Use the following two statements to answer this question:
I.In equilibrium, the expected return on all properly priced securities will lie on the SML.
II.Securities that are undervalued will lie below the SML.
A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question

Quizplus · Accepted Answer

Statement I is correct, as it is one of the basic assumptions of the Capital Asset Pricing Model (CAPM). However, statement II is incorrect – undervalued securities are expected to lie above the SML to provide a higher return than what is predicted by the CAPM.

Use the Following Two Statements to Answer This Question