Which statement is correct? Any portfolio that is correctly valued will have a beta of 1.0. A risk-free security plots at the origin on a security market line graph. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0. An underpriced security will plot above the security market line.

Question

Ruby Weiss

Business

14 November, 13:47

Which statement is correct? Any portfolio that is correctly valued will have a beta of 1.0. A risk-free security plots at the origin on a security market line graph. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0. An underpriced security will plot above the security market line.

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Answers (1)

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Payten Orr · Answer 1

An underpriced security will plot above the security market line.

Explanation:

Underpriced stocks (or securities) are those whose market value is below its earnings and risk value. Underpriced securities represent a lower risk and higher potential returns.

The security market line (SML) represents the capital asset pricing model (CAPM) and it shows risk-return relationships for securities. Since underpriced securities generate higher returns per risk, they are plotted above the SML.