Investment projects that plot above the security market line have:
A) a positive NPV.
B) a negative NPV.
C) a zero NPV.
D) an excessively high discount rate.

Question

Quizplus · Accepted Answer

The security market line is the line that represents the risk-return trade-off for all securities in the market. Any investment project that plots above this line is generating a return that is higher than what would be expected given its level of risk, indicating a positive NPV. Therefore, the best choice is A, as investment projects that plot above the security market line have a positive NPV. B, C, and D are incorrect because investment projects that plot above the security market line are generating a return higher than the required return, indicating a positive NPV, rather than a negative or zero NPV, or excessively high discount rate.

Investment Projects That Plot Above the Security Market Line Have