Which of the following is not a major disadvantage to the SM

Which of the following is not a major disadvantage to the SML approach?

A. It requires that we estimate the market risk premium, and if this estimate is poor, the resulting cost of equity will also be poor.

B. It doesn\'t explicitly adjust for risk.

C. It requires that we estimate the beta coefficient of the stock, and if this estimate is poor, the resulting cost of equity will also be poor.

D. We rely on the past to predict the future, and economic conditions can change quickly.

Solution

correct option is B\"-It doesn\'t explicitly adjust for risk.

Security market line shows the relationship between market risk premium and expected return .It shows how expected return will adjust with increase or decrease in beta( systematic /non diversifiable risk).so Adjustment for risk is an advantage for under SML approach (not an disadvantage)