What would you recommend to an investor who is considering an investment that, according to its beta, plots below the security market line?
A) Invest; The return is high relative to the risk.
B) Don't invest; The risk is high relative to the return.
C) Invest; All stocks revert to the SML over time.
D)Don't invest; All stocks below the SML are low-growth stocks.

Question

Quizplus · Accepted Answer

A beta that plots below the security market line indicates that the expected return is lower relative to the risk involved. This means that the stock is considered riskier than the market as a whole, but with a lower potential return. Therefore, it is not recommended to invest as the risk is high relative to the return.

What Would You Recommend to an Investor Who Is Considering