If markets are truly efficient and in equilibrium
A)all securities would lie on the SML.
B)any security that plots below the SML would be considered undervalued.
C)any security that lies above the SML would be considered overvalued.
D)no security would lie on the SML..

Question

Quizplus · Accepted Answer

If markets are truly efficient and in equilibrium, all securities would lie on the Security Market Line (SML). The SML is a graphical representation of the Capital Asset Pricing Model (CAPM) which shows the expected return of a security based on its level of risk (beta). Therefore, the efficient market hypothesis suggests that all securities are fairly valued based on their level of risk according to the CAPM, and an investor cannot consistently achieve returns above the market average without taking on additional risk.

If Markets Are Truly Efficient and in Equilibrium