Money & Finance · intermediate
What moves on the CAPM (Security Market Line) diagram
A higher market risk premiumrisk premiumThe extra expected return demanded for bearing risk instead of holding the safe asset. steepens the SML: required returns rise most for high-betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM. assets.
The SML's slope is the price of risk.
Panic raises what investors demand per unit of betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM., the line steepens.
High-betabetaAn asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM. assets are crushed while defensive ones barely move. Sell-offs are steepenings, not parallel falls.
Examiners ask this as: risk premium spikes, flight to safety beta.
Other scenarios on CAPM (Security Market Line)