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Answer: Systematic risk
The security market line (SML) is a graphical representation of the capital asset pricing model (CAPM), where beta (reflecting systematic risk) is plotted on the x-axis and expected return on the y-axis. Systematic risk is the relevant measure for the SML, as it captures the non-diversifiable risk inherent in the portfolio. Total risk includes both systematic and unsystematic risk, while unsystematic risk is diversifiable and not reflected in the SML.
Author: LeetQuiz Editorial Team
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The security market line (SML) plots the expected return of a portfolio against which of the following measures of the portfolio's risk?
A
Total risk
B
Systematic risk
C
Unsystematic risk