Would you prefer to own stocks whose risk/return are "below", "on", or "above" the SML (Securities...

Would you prefer to own stocks whose risk/return are "below", "on", or "above" the SML (Securities Market Line). Note: The SML is a visual representation of the CAPM.

a. On the SML

b. Not enough Information

c. Above the SML

d. Below the SML

Expert Solution

Answer : (c) Above the SML

Explanation: SML is a graphical depiction of the CAPM and plots risks relative to expected returns.

When a security is plotted on the SML chart, if it appears above the SML, it is considered to be undervalued because the position on the chart indicates that the security offers a greater return against its inherent risk.

So, it would be preferred to own stocks whose risk/return are above the SML

jeff jeffy answered 2 years ago

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