If an asset has a risk-return combination that is below the Security Market Line (SML), then this indicates that the asset's
A) expected rate of return is lower than could be had from some combination of the risk-free asset and the market portfolio.
B) expected rate of return is higher than could be had from some combination of the risk-free asset and the market portfolio.
C) price will rise as arbitrage proceeds in the market.
D) risk will rise as arbitrage proceeds in the market.

Question

Quizplus · Accepted Answer

The SML represents the expected return of an asset based on its level of risk relative to the market. If an asset has a risk-return combination below the SML, it means that its expected rate of return is lower than what could be attained from a combination of the risk-free asset and the market portfolio. Therefore, the best choice is A.

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