If a security plots below the security market line, it is:
A)Not rewarding the investor for its unique risk
B)Underpriced, a situation that should be temporary
C)Offering too little return to justify its risk
D)A defensive security, which expects to offer lower returns

Question

Quizplus · Accepted Answer

The security market line represents the expected return of a security based on its beta (systematic risk). If a security plots below the security market line, it means that its actual return is lower than what is expected based on its level of risk. This implies that the security is not offering enough return to justify its risk, making option C the correct choice. Options A, B, and D are not correct because they do not adequately describe the situation of a security plotting below the security market line.

If a Security Plots Below the Security Market Line, It