Security Market Line

CFA Level I
#1

I was reading my own notes and noticed some contradictary points, can someone fix the wrong one(s) for me?

  1. zero beta: no systematic risk
  2. zero beta CAPM results in SML
  3. Slope of SML is market risk premium that compensate the systemetic risk.

Help please!

Thank you.

#2

Not sure point 2 is correct.

The SML is a graphical representation of the equation provided by the CAPM.

It graphs the expected return of a security as a function of the beta.

#3

Number 2 is definitely wrong; beta is the independent variable (abcissa) in the SML.

I wrote an article on the SML that may be of some help: http://financialexamhelp123.com/cal-vs-cml-vs-sml/

#4

Thanks a lot.

#5

My pleasure.

#6

question on number 1, can you ever have “no” systematic risk? I know that systematic risk is measured by the covariance of the returns compared to the return of the market portfolio and is a component of total risk, i guess i never thought of it in having “no” risk. Any insight would be great

#7

It’s possible (in theory, at least) to create a zero-beta portfolio.

Its expected return should be the risk-free rate.