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

Question

Quizplus · Accepted Answer

The security market line represents the expected return for a given level of systematic risk, as per the CAPM model. A stock with an actual return above the security market line has earned a higher return than what was expected for the level of risk it assumed, indicating that it is undervalued or has provided higher-than-expected returns.

A Stock with an Actual Return That Lies Above the Security