What is the intercept of the security market line SML )?

The Security Market Line: This is an example of a security market line graphed. The y-intercept of this line is the risk-free rate (the ROI of an investment with beta value of 0), and the slope is the premium that the market charges for risk.

What is the slope of the security market line SML )?

The slope of the security market line represents the market risk premium, i.e. the excess return over the market return. The market risk premium compensates for the additional systematic risk associated with the security.

What is the slope of the security market line SML quizlet?

The slope of the SML, which is the difference between the expected return on a market portfolio and the risk-free rate. In other words, it is the reward investors expect to earn for holding a portfolio of beta of 1. The equation of the SML showing the relationship between expected return and beta.

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What causes the SML to shift?

Shifts in the SML

Several different exogenous variables can impact the slope of the security market line. For example, the real interest rate in the economy might change; inflation may pick up or slow down; or a recession can occur and investors become generally more risk-averse.

Does market portfolio lie on SML?

Fairly priced portfolios lie on the SML while undervalued and overvalued portfolio lies above and below the line respectively.

Is the intercept on the security market line?

The security market line is the theoretical line on which all capital investments lie. … Assuming a linear relationship between risk and return, the assumption is that the y-intercept is the return on a risk-free investment (the risk free rate), and the slope is the premium on risk in terms of expected returns.

How is security market line calculated?

The formula for plotting the SML is required return = risk-free rate of return + beta (market return – risk-free rate of return).

What is the intercept of the security market line SML )? Quizlet?

What is the intercept of the Security Market Line (SML)? The Risk-Free Rate. Two factors determine a stock’s total return?

What is the security market line quizlet?

Definition of SML. The line that reflects the relationship between systematic risk and return available for all risky assets in the capital market at a given time.

What is the slope in CAPM?

The Capital Market Line relates the excess expected return on an efficient market portfolio to it’s Risk. The slope of the CML is the Sharpe Ratio for the market portfolio. The Security Market line is constructed by calculating the line of Risk Premium over CAPM. beta .

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What is the difference between CML and SML?

Capital Market Line vs.

The CML is sometimes confused with the security market line (SML). The SML is derived from the CML. While the CML shows the rates of return for a specific portfolio, the SML represents the market’s risk and return at a given time, and shows the expected returns of individual assets.

Why SML is a straight line?

The assets above the line are undervalued because for a given amount of risk (beta), they yield a higher return. The assets below the line are overvalued because for a given amount of risk, they yield a lower return. … Therefore, the SML continues in a straight line whether beta is positive or negative.

What risk is Diversifiable?

Specific risk, or diversifiable risk, is the risk of losing an investment due to company or industry-specific hazard. Unlike systematic risk, an investor can only mitigate against unsystematic risk through diversification.

Can SML be negative?

The two curves are equivalent only if (i.e., portfolio i is perfectly correlated with the market portfolio); if , and E(Ri) is equal, the CML has a higher slope with respect to the SML; with , the SML will have a negative slope. …

How do you calculate alpha?

What is Alpha Formula?

  1. Alpha = Actual Rate of Return – Expected Rate of Return. …
  2. Expected Rate of Return = Risk-Free Rate + β * Market Risk Premium. …
  3. Alpha = Actual Rate of Return – Risk-Free Rate – β * Market Risk Premium.

Is positive alpha overpriced?

According to the Capital Asset Pricing Model (CAPM), a. a security with a positive alpha is considered overpriced. … a security with a zero alpha is considered to be a good buy.

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