Question

Choose the best answer, and why. The principal risk return relationship most commonly used in finance...

Choose the best answer, and why.

The principal risk return relationship most commonly used in finance (particularly at our level) is called CAPM or SML?

A. They are both basically the same and often used synonymously

B. None of these are correct

C. Cannot be answered.

D. It is called the characteristics Line

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Homework Answers

Answer #1

ANS: A. They are both basically the same and often used synonymously

Capital Asset Pricing Model (CAPM) describes the relationship between the systematic risk of a security and its expected return whereas Security Market Line (SML) uses the Capital Asset Pricing Model only to plot the relationship between the systematic risk and expected retrun of the security. Security Market Line (SML) is nothing but a graphical representation of Capital Asset Pricing Model (CAPM).

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