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

Question

Quizplus · Accepted Answer

The security market line represents the expected rate of return based on the level of systematic risk (beta) assumed by the investors. Any stock that lies above the security market line has provided a higher actual return than what was expected based on its beta. This indicates that the stock has yielded a higher return than expected for the level of risk assumed. Therefore, option E is the correct answer.

A Stock with an Actual Return That Lies Above the Security