If markets are efficient and in equilibrium:
A) all assets would lie on the SML.
B) any assets that plot below the SML would be considered undervalued.
C) any assets that lie above the SML would be considered overvalued.
D) no assets would lie on the SML.

Question

Quizplus · Accepted Answer

In efficient markets where assets are in equilibrium, all assets would indeed lie on the Security Market Line (SML). The SML represents the expected return of assets as a function of their systematic, or market, risk. It is based on the assumption that investors will require higher returns to compensate for higher risk, which is a fundamental concept in the Capital Asset Pricing Model (CAPM).

If Markets Are Efficient and in Equilibrium