The market rate of return is 12% and the risk-free rate of return is 4%. A stock that has 5% more risk than the market has an actual return of 12%. Given this information, the stock will plot above the security market line.

Question

Quizplus · Accepted Answer

The stock will plot below the security market line because its actual return equals the market rate of return despite having higher risk, indicating it is not compensating for the additional risk as per the Capital Asset Pricing Model (CAPM).

The Market Rate of Return Is 12% and the Risk-Free