Money & Finance · advanced
What moves on the CAPM (Security Market Line) diagram
Leverage raises equity betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM.; the CAPM prices the move as a higher required return along the SML.
Your asset sits on the SML at its betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM..
Heavy borrowing amplifies its swings, betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM. slides right.
Required return rises along the line. Leverage doesn't create value here; it just moves you along the risk menu.
Examiners ask this as: leverage beta rises, riskier firm required return.
Other scenarios on CAPM (Security Market Line)