A security that is fairly priced will have a return _____ the Security Market Line.
A) below
B) on or below
C) on
D) on or above
E) above

Question

Quizplus · Accepted Answer

A security that is fairly priced should have a return that is in line with the Security Market Line (SML). The SML represents the expected return of a security given its level of risk (as measured by beta) and the market's risk premium. Therefore, a security that is fairly priced should have a return on the SML, indicating that investors are being compensated for the level of risk they are taking on. An answer of "on or above" could also be valid, as a security that is slightly overpriced may still have a return close to the SML. However, an answer of "above" or "below" would indicate that the security is mispriced and does not have an appropriate risk-return relationship.

A Security That Is Fairly Priced Will Have a Return