In the data, we often find the slope relating asset betas to average returns to be too shallow, as shown in the graph below. Equal-Weighted Beta Portfolios (1927-1993) 25 20 15 Annual Return (%) 10 SML 5 0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 Beta This observation implies that 1. Low beta stocks have tended to have had higher CAPM alphas than high beta stocks 2. Investors have typically earned insufficient additional return - relative to the predictions of the CAPM - for choosing investments with higher market risk 3. All assets have had greater risk-adjusted returns than the market portfolio 1 and 2 1 and 3 O 2 and 3 O 1, 2, and 3