If you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that investors in the market expect the observed relationship to continue on into the future.
The slope of the SML is determined by the value of beta.
The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by managers.
If investors become less risk averse, the slope of the Security Market Line will increase.
If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.
This question was asked on May 29, 2010 and answered on May 29, 2010.
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