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

Since the stock has a beta of 0.98, it is slightly less risky than the market, which has a beta of 1. Therefore, it should plot to the left of the market. Since it is overpriced, its expected return will be lower than what the security market line suggests for its level of risk, which means it should plot below the security market line.

Assume You Are Looking at a Security Market Line Graph