Question

In the theoretical Capital Asset Pricing Model (CAPM), the slope of the Securities Market Line (SML)...

In the theoretical Capital Asset Pricing Model (CAPM), the slope of the Securities Market Line (SML) is determined by the value of beta. True or False?

Homework Answers

Answer #1

False

The slope of Securities Market Line as determined by CAPM model is not beta but it is equity or market risk premium that is market return-risk free rate. The slope is same for every stock, it is the beta that changes and hence the required return changes. In SML, beta is the independent variable, market risk premium is slope, risk free rate is intercept and required/expected return is the dependent variable.

E(return of stock)=risk free+market risk premium*beta of the stock

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