Investors place alternative investments somewhere along the SML based on their perceptions of the risk of the investment. Obviously, if an investment’s risk changes due to a change in one of its risk sources (business risk, and such), it will move along the SML. For example, if a firm increases its financial risk by selling a large bond issue that increases its financial leverage, investors will perceive its common stock as riskier and the stock will move up the SML to a higher risk position. Investors will then require a higher rate of return. As the common stock becomes riskier, it changes its position on the SML. Any change in an asset that affects its fundamental risk factors or its market risk (that is, its beta) will cause the asset to move along the SML.

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