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taparia keshav
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Asked: 2023-08-28T09:02:22+05:30 In:

portfolio mgt r and r

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Portfolios that plot on the security market line in equilibrium:
A) must be well diversified.

B) have only systematic (beta) risk.

C) may be concentrated in only a few stocks

 

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    4 Answers

    1. Ispaat Sengupta
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      The correct answer is:

      A) must be well diversified.

      Portfolios that plot on the security market line (SML) in equilibrium are efficient portfolios that offer the best risk-return trade-off for a given level of risk. The SML represents the relationship between expected return and systematic risk (measured by beta) in the market. Portfolios that lie on the SML are optimal in the sense that they provide the maximum expected return for a given level of risk, or they provide the minimum risk for a given level of expected return.

      Since these portfolios are considered optimal, they are constructed using a diverse set of assets to achieve the desired risk-return characteristics. This diversification helps to reduce unsystematic (specific) risk and concentrate on systematic risk, which is relevant for the SML and the market as a whole. Therefore, option A) is the correct choice: Portfolios that plot on the SML must be well diversified.

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