Explanation

The correct answer is B. Security market line (SML).

Key Concepts:

1. Security Market Line (SML):

   • The SML is a graphical representation of the Capital Asset Pricing Model (CAPM)
   • It plots systematic risk (beta) on the horizontal axis
   • It plots expected return on the vertical axis
   • The slope of the SML represents the market risk premium
   • Formula: E(R_i) = R_f + β_i × (E(R_m) - R_f)

2. Capital Market Line (CML):

   • The CML plots total risk (standard deviation) on the horizontal axis
   • It shows the risk-return tradeoff for efficient portfolios
   • It connects the risk-free asset to the market portfolio

3. Capital Allocation Line (CAL):

   • The CAL plots total risk (standard deviation) on the horizontal axis
   • It shows the risk-return tradeoff for any portfolio combining a risky asset with a risk-free asset

Why SML uses systematic risk:

• The SML focuses specifically on systematic (non-diversifiable) risk measured by beta
• Beta measures an asset's sensitivity to market movements
• In CAPM, only systematic risk is priced, as unsystematic risk can be diversified away
• This makes beta the appropriate risk measure for individual securities on the SML

Comparison Table:

Therefore, among the given options, only the Security Market Line (SML) uses systematic risk (beta) on the horizontal axis.