Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of .98 plot on that graph?
A)To the right of the market and below the security market line
B)To the left of the market and below the security market line
C)To the right of the market and above the security market line
D)To the left of the market and above the security market line
E)To the right of the market on the security market line

Question

Quizplus · Accepted Answer

An overpriced stock with a beta of .98 would have a lower expected return than the market return for its level of risk (beta). This means it would plot below the security market line. Since its beta is less than 1, it would also plot to the left of the market on the security market line. Therefore, the correct answer is B - to the left of the market and below the security market line.

Assume You Are Looking at a Security Market Line Graph