A project which plots below the security market line (SML) A. has a positive net present...

A project which plots below the security market line (SML) A. has a positive net present value. B should be rejected. C should be accepted. D None of the above.

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Security Market Line

The security market line is an investment evaluation tool derived from the CAPM—a model that describes risk-return relationship for securities—and is based on the assumption that investors need to be compensated for both the time value of money (TVM) and the corresponding level of risk associated with any investment, referred to as the risk premium.

When a security is plotted on the SML chart, if it appears above the SML, it is considered undervalued because the position on the chart indicates that the security offers a greater return against its inherent risk. Conversely, if the security plots below the SML, it is considered overvalued in price because the expected return does not overcome the inherent risk.

Hence ,the right answer is Rejected the project .because, security below the SML line it considered overvalued in price because the expected return does not overcome the inherent risk.

jeff jeffy answered 1 year ago

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