- “The capital market line (CML) uses a measure of total risk, and the SML uses a standardized measure of systematic risk” 4. “The SML is the equation that specifies the required/expected return for a security that is implied by the CML when the market is in equillibrium.” Are statements #3 and #4 correct regarding types of: risk measures? — equilibrium? A.) No — No B.) No — Yes C.) Yes— No D.) Yes— Yes
B?
I feel C? Stmt1: Correct CML - > STD (total risk) SML -> beta (standardized) Stmt2: Incorrect SML is the equation that specifies the RRR that is implied by the CAPM when the market is in equillibrium.
C !
I had enough for tonight but I don’t want to leave you all hanging… D was the correct answer given. Statement # 3 as expected… the explanation for statment #4 was: The SML is based on the CML and both are equilibrium relationships. I chose C as well, thinking that the SML is the graph of the CAPM line, the relationship between expected return and systematic risk. is the SML based on the CML? that just didn’t sit right given statement #3. Was this tricky wording? Even if the first part of the statement is wrong (not based on CML but on CAPM) the part about equilibrium was right and since they only asked about statement #4 regarding types of equilibrium… the answer was Yes — Yes?