If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's:

Question

Quizplus · Accepted Answer

The SML represents the expected return of an asset given its level of risk (as measured by beta) in comparison to the market portfolio. Assets that fall below the SML indicate that they have a lower expected return than a combination of the risk-free asset and the market portfolio would provide, which means they are not priced efficiently and underpriced. As a result, investors could earn excess returns and arbitrage proceeds will lead to an increase in the price of the asset.

If an Asset Has a Risk-Return Combination That Is Below