You are considering investing in one of three investments - A, B or C.When plotted against the CML, Investment A is below the CML line, Investment B is above the CML line and Investment C is right on the CML line.Which of the following statements is then true?
A)Investment A is the best investment because it will be underpriced in the market because it has a higher level of risk than the other investments
B)Investment B is the best investment because it is underpriced since the expected rate of return is less than the required rate of return
C)Investment C has identical expected and required rates of return so this investment is the most fairly priced
D)The question cannot be answered with the information given

Question

Quizplus · Accepted Answer

Investment C is the most fairly priced because it has identical expected and required rates of return. The fact that Investment A is below the CML line indicates that it has a lower expected rate of return than what is required based on its level of risk. Investment B being above the CML line means it has a higher expected rate of return than what is required based on its level of risk. Therefore, neither of these investments is underpriced or a better choice than Investment C.

You Are Considering Investing in One of Three Investments -