A share with an actual return that lies above the security market line:
A)has more systematic risk than the overall market.
B)has more risk than warranted based on the realized rate of return.
C)has yielded a higher return than expected for the level of risk assumed.
D)has less systematic risk than the overall market.
E)has yielded a return equivalent to the level of risk assumed.

Question

Quizplus · Accepted Answer

The security market line (SML) depicts the relationship between expected return and systematic risk for assets in the market. If a share has an actual return above the SML, it means that it has yielded a higher return than expected for the level of risk assumed. This implies that the share has either been undervalued or that the firm has performed better than anticipated. Therefore, the correct answer is C.

A Share with an Actual Return That Lies Above the Security