Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:
A) To the right of the overall market.
B) To the left of the overall market.
C) Above the security market line.
D) On the security market line.
E) Below the security market line.

Question

Quizplus · Accepted Answer

An undervalued stock will plot above the security market line because it offers a higher return for its level of risk compared to what the security market line predicts, indicating it is a better investment than what the market currently prices it at.

Assume You Are Looking at a Graph Depicting the Security