Financial Risk Manager Part 1

The Security Market Line (SML) uses systematic risk, measured by Beta, on its X-axis. The SML is a graphical representation of the Capital Asset Pricing Model (CAPM), which depicts the relationship between the expected return of a security and its systematic risk. The Y-axis represents the expected return of a security, while the X-axis represents its systematic risk, measured by Beta. Beta is a measure of a security's sensitivity to market movements. A Beta of 1 indicates that the security's price will move with the market, while a Beta less than 1 indicates that the security will be less volatile than the market, and a Beta greater than 1 indicates that the security will be more volatile than the market. Therefore, the SML helps investors understand the risk-return tradeoff for a particular security in relation to the overall market.

Choice B is incorrect. The Capital Market Line (CML) uses total risk, which includes both systematic and unsystematic risk, on its X-axis. It does not solely represent the relationship between expected return and systematic risk.

Choice C is incorrect. The Capital Allocation Line (CAL) also uses total risk on its X-axis to depict the trade-off between expected return and risk for a specific portfolio combined with a risk-free asset. It does not specifically use systematic or market risk.

Choice D is incorrect. The Capital Asset Pricing Model (CAPM) is not a line or model that graphically represents the relationship between expected return and any form of risk on an axis. Instead, it's an equation that calculates the expected return of an asset based on its beta (systematic risk), but it doesn't plot this relationship graphically like the Security Market Line does.