Asked by Ashreet Dhiman on Jul 11, 2024
Verified
Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:
A) To the right of the overall market.
B) To the left of the overall market.
C) Above the security market line.
D) On the security market line.
E) Below the security market line.
Security Market Line
A line graph that represents the relationship between risk (beta) and the expected return of the market and various securities.
- Comprehend the principles of the security market line (SML) and beta, along with their importance in managing portfolios.
Verified Answer
KC
katrina crouseJul 18, 2024
Final Answer :
C
Explanation :
An undervalued stock will plot above the security market line because it offers a higher return for its level of risk compared to what the security market line predicts, indicating it is a better investment than what the market currently prices it at.
Learning Objectives
- Comprehend the principles of the security market line (SML) and beta, along with their importance in managing portfolios.