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

Question

Quizplus · Accepted Answer

The security market line represents the expected return given the level of systematic risk, as measured by beta. If a stock's actual return lies above the security market line, it means that it has yielded a higher return than expected for the level of risk assumed. This could be due to a number of factors, such as superior management or an innovative product. It does not necessarily mean that the stock has more systematic risk than the overall market, and it may or may not have more risk than warranted based on the realized rate of return. Therefore, the best answer is C: has yielded a higher return than expected for the level of risk assumed.

A Stock with an Actual Return That Lies Above the Security