Section 7
Understanding the Security Market Line
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By Boundless
Boundless Finance
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by Boundless
3 concepts
Expected Risk and Risk Premium
Overall riskiness of an asset is composed of its own individual risk (beta) along with its risk in relation to the market as a whole.
Defining the Security Market Line
The security market line displays the expected rate of return of a security as a function of systematic, non-diversifiable risk.
Impact of the SML on the Cost of Capital
The plotted location of an instrument on the SML has consequences on its price, return, and cost of capital it contributes to a firm.