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b. Briefly discuss the concept of the Security Market Line (SML), and explain why all assets...

b. Briefly discuss the concept of the Security Market Line (SML), and explain why all assets must plot
directly on it in a competitive market
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Answer #1

Security market line is a graphical representation of Capital Asset pricing model which reflect different levels of systematic risk (i,e beta) for a different level of expected return.

Investors actions will adjust the prices of the assets to fall on that line. Since the market is competitive & efficient and all the relevant information is readily available.So if financial markets are competitive then returns provide full summary of investment opportunities

And Market portfolio consist of all the assets. So it is well diverdified and only have systmeatic risk(i,e beta)

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