Where will a security plot in relation to the security market line (SML)if it has a beta of 1.1 and is overvalued?
A)to the right of the overall market and above the SML
B)to the right of the overall market and below the SML
C)to the left of the overall market and above the SML
D)to the left of the overall market and below the SML
E)on the SML

Question

Quizplus · Accepted Answer

A security with a beta of 1.1 is more volatile than the overall market, which means it should have a higher expected return to compensate for the additional risk. If it is overvalued, it means that its actual return is higher than its expected return based on its risk level, so it will be plotted to the right of the overall market, but below the SML.

Where Will a Security Plot in Relation to the Security