[Solved] If an asset’s expected return plots above the security market line, the asset is:

Q.	If an asset’s expected return plots above the security market line, the asset is:
A.	fairly priced (if it has an unusually large amount of unique risk).
B.	under priced.
C.	overpric
Answer» B. under priced.

1.8k

Do you find this helpful?

View all MCQs in

Security Analysis and Investment Management

Discussion

No comments yet

Related MCQs

The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to
Which of the statements is/are false regarding Arbitrage Pricing Theory (APT)? I. APT assumes that return on any asset can be expressed as a linear function of a set of market factors or indexes. II. The arbitrage price line indicates relation between unsystematic risk and the expected return of an asset. III. While deriving the APT model, APT assumes that the error term can be reduced to zero through appropriate diversification.
Which of the following statements is/are true with respect Capital Market Line (CML)? I. It is the line passing from risk-free rate through market portfolio. II. The slope of CML is called market price of risk. III. CML fails to express equilibrium pricing relationship between expected return and standard deviation for all efficient portfolios lying along the line.
According to security market line, the expected return of any security is a function of:
The alpha of an active portfolio is 1%. The expected return on the market index is 16%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio is __________.
The market risk premium is 15% and the risk-free rate is 5%. The beta of Asset D is 0.2. What is Asset D’s expected return under the CAPM?
Stock A has a beta of 1.0 and very high unique risk. If the expected return on the market is 20%, then according to the CAPM the expected return on Stock A will be:
If the risk free rate of return (Rf) is 7%, expected return on the market [E(Rm)] is 15%, and the return on stock X is 16%, the beta for the stock X using CAPM is
The return expected = ……….+ Beta portfolio (Return of Market - Risk Free Return)