In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a positive NPV and those falling below the SML would have a negative NPV.

Question

Quizplus · Accepted Answer

This statement is true. Projects that fall above the SML have a higher expected return than their risk level justifies, and would therefore have a positive NPV. Projects that fall below the SML have a lower expected return than their risk level justifies, and would therefore have a negative NPV.

In Applying Risk-Adjusted Discount Rates to Project Selection, Projects Falling