CFA Practice Question

CFA Practice Question

In equilibrium, all assets and all portfolios of assets should be ______
A. on or below the security market line (SML).
B. on the security market line.
C. on the Markowitz efficient frontier.
Explanation: According to the capital market theorem, the SML is the new efficient frontier on which all investments must be located. If an asset is below the SML, that would indicate that its expected rate of return is too low to justify its particular risk level. Demand for that asset would weaken, causing the price to decline until the expected return would be justified by the risk level. The SML plots the points where the expected rate of return is justified by the risk level.

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