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The slope of the Security Market Line is equal to A) beta. B) the risk-free interest...

The slope of the Security Market Line is equal to

A) beta.

B) the risk-free interest rate.

C) the equity premium.

D) none of the above
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Answer #1

The Correct answer is C - The equity premium

The slope of the Security Market Line is equal to Market Risk Premium. The Security Market Line is an upward sloping straight line and it is a graphical representation of the Capital Asset Pricing model.It shows the relationship between systematic risk and expected return . The Security Market Line is represented by Re = Rf + (Rm-Rf) beta. The Market Risk Premium i.e (Rm-Rf) is also referred as the equity premium.

The equity premium shows the return an investor can get above the risk free rate by investing in a market portfolio.

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