Explanation:
Stock A lies above the SML. The return on the stock is more than its expected return as predicted by the CAPM. As such, the stock is undervalued and, therefore, a good buy.
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Q.2385 Consider the graph of expected returns presented below. The line represents the security market line derived from the Capital Asset Pricing Model (CAPM). A, B, C, M, O, X, and Y all represent different stocks.
According to CAPM, stock A is:
A
Undervalued
B
Overvalued
C
Dependent on the financial market
D
Appropriately valued
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