Answer :
The Security Market Line would be affected as follows: The y-axis intercept would decline, and the slope would increase.
What is security market line?
- The capital asset pricing model (CAPM), which displays varying levels of systematic, or market risk, of various marketable securities, plotted against the projected return of the entire market at any one time, is represented graphically by the security market line (SML), a line drawn on a chart.
- A security's market risk premium depends on where on the chart it is displayed in relation to the SML.
- The security market line is a tool for evaluating investments that was derived from the CAPM, a model that describes the relationship between risk and return for securities.
- It is predicated on the idea that investors must be compensated for both the time value of money (TVM) and the risk premium, also known as the corresponding level of risk associated with any investment.
The SML, also referred to as the "characteristic line," is a representation of the CAPM, with the expected return on the y-axis and risk (measured in terms of beta) on the x-axis.
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