Question

Which of the following statements is/are incorrect? 1) A security's beta measures its market risk. 2) If investors become less risk averse, the slope of SML will decrease accordingly. 3) The tighter the probability distribution of its expected future return, the greater risk of a given investment as measured by its standard deviation. 4) SML is a graphical depiction of CAPM?

Answer 1

All the statement except statement 3 are true.

This is because the tighter the probability distribution of its expected future return, the greater risk of a given instrument is not measured by standard deviation,it is measured by its expected rate of return through the probability analysis.

rest of the statements are true because the beta measures the systematic risk which is also known as the market risk, and SML is a graphical depiction of CAPM.

Show the answer would be statement ( 3).