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What does the Security Market Line (SML) represent:

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A) Relationship between risk and return for all possible portfolios
B) Relationship between interest rate and inflation
C) Relationship between dividend and earnings
D) Relationship between systematic risk (beta) and expected return

Correct Answer: D) Relationship between systematic risk (beta) and expected return

• The graphical Security Market Line (SML) perfectly plots the Relationship between systematic risk (beta) and expected return. • It heavily serves as the visual graphical representation of the massive Capital Asset Pricing Model (CAPM). • In this specific financial model, the baseline non-risky benchmark is called the Risk-free rate. • Any individual asset plotting directly above the SML is mathematically considered Undervalued. • A stock's specific sensitivity to overall broad market movements is mathematically measured by Beta.

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