Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Question

Quizplus · Accepted Answer

The security market line represents the expected return on an asset based on its beta, a measure of its systematic risk. If a stock plots above the security market line, it means that its expected return is higher than what is required given its level of risk. This indicates that the stock is underpriced, as investors can expect to earn higher returns than they would from a stock with similar risk characteristics.

Stocks That Plot Above the Security Market Line Are Underpriced