If the reward-to-risk ratio of a security is greater than that supported by the security market line,then the security:
A)is one which compensates investors for the total risk associated with that security
B)is one which compensates investors for unsystematic risk
C)is under-priced in the marketplace
D)must have a beta which is greater than 1.0
E)must be trading in a market which is strong-form efficient

Question

Quizplus · Accepted Answer

The reward-to-risk ratio of a security that is greater than that supported by the security market line suggests that the security is under-priced in the marketplace. This means that its expected return is higher than what is required to compensate for its risk level, and thus, it offers an attractive investment opportunity. Investors would try to buy such a security to take advantage of the under-pricing, and this buying pressure would drive up the price and lower the reward-to-risk ratio until it falls in line with the security market line.

If the Reward-To-Risk Ratio of a Security Is Greater Than