Answered

A security that falls above the security market line has:


Aa high expected return and a high price
Ba low expected return and a low price
Ca low expected return and a high price
Da high expected return and a low price

Verified Answer :

Final answer:

A security that falls above the Security Market Line has a high expected return and a low price. This indicates that it is potentially undervalued relative to the risk associated with it. Thus, the correct choice is 'A high expected return and a low price.'


Explanation:

Understanding the Security Market Line

The Security Market Line (SML) is a graphical representation used in capital asset pricing model (CAPM) that illustrates the relationship between the expected return of a security and its systematic risk, as measured by beta. According to the SML, a security that lies above this line indicates a greater expected return for the level of risk taken.

Key Characteristics of Securities Above the SML

A security that is positioned above the SML demonstrates the following characteristics:

  • High expected return
  • Typically a low price compared to its risk

Therefore, in the choices provided, the correct answer is:

  • A high expected return and a low price

This suggests that the security is undervalued relative to its expected return when factoring in its risk.


Learn more about Security Market Line here:

https://brainly.com/question/24182190


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