Which of the following is the best definition of security market line (SML)?

Multiple Choice

1. Positively sloped straight line displaying the relationship between expected return and beta.

2. A risk that affects at most a small number of assets. Also called unique or asset-specific risks.

3. A theory showing that the expected return on any risky asset is a linear combination of various factors.

4. A risk that influences a large number of assets. Also called market risk.

5. Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.