What does the Security Market Line (SML) represent in the Capital Asset Pricing Model (CAPM)?

The Security Market Line (SML) represents a key concept in the Capital Asset Pricing Model (CAPM) by providing a graphic representation of the relationship between the systematic risk of an asset and its expected return. The SML plots the expected return of an investment against its beta, which measures its sensitivity to market movements.

Assets that lie on the SML are considered fairly priced, as their expected return compensates for the level of inherent risk. Those above the line indicate an undervalued asset with expected returns greater than what is justified by their risk, while those below the line are overvalued. This clear graphical depiction helps investors assess whether they are being appropriately compensated for the risks they are taking on by investing in particular securities relative to the broader market.

The other options describe different aspects of market behavior or metrics but do not capture the essence of the SML's role in illustrating the risk-return relationship prescribed by CAPM.