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The _____ of a security divided by the beta of that security is equal to the...

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. Real return Actual return Nominal return Risk premium Expected return

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Answer #1

Answer is - Risk Premium of Security

This question applies the CAPM Equation. Based on this model or equation,

Expected return on security = Risk free rate + Beta * Market Risk Premium

Market Risk Premium = Expected Market Return - Risk free rate

If we re-arrange the CAPM Equation,

Market Risk Premium = (Expected return on secturity - Risk free rate)/Beta

'Expected return on secturity - Risk free rate' signifies the risk premium on security, i.e., the excess over risk free rate that is earned by this security.

=> Market Risk Premium = (Risk premium on securities)/Beta

Slope of Security Market Line is the Market Risk Premium. This implies slope of SML is Risk premium of security divided by beta.

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