Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of 0.98 plot on that graph?
A)To the right of the market and below the security market line
B)To the left of the market and below the security market line
C)To the right of the market and above the security market line
D)To the left of the market and above the security market line
E)To the right of the market on the security market line

Question

Quizplus · Accepted Answer

An overpriced stock would have a higher price than its expected return based on its level of risk (beta), so it would fall below the security market line. Since the stock has a beta of 0.98, which is less than 1, it is less volatile than the overall market, so it would be to the left of the market. Therefore, the correct option is B, to the left of the market and below the security market line.

Assume You Are Looking at a Security Market Line Graph