Which statement is correct?

1. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.

2. Any portfolio that is correctly valued will have a beta of 1.0.

3. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.

4. A risk-free security plots at the origin on a security market line graph. An underpriced security will plot above the security market line.

Question

Business

Rafael Holder

22 February, 14:55

Which statement is correct?

1. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.

2. Any portfolio that is correctly valued will have a beta of 1.0.

3. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.

4. A risk-free security plots at the origin on a security market line graph. An underpriced security will plot above the security market line.

+1

Answers (1)

Know the Answer?

Frederick Murray · Answer 1

An underpriced security will plot above the security market line.

Explanation:

A security market line is plotted from capital asset pricing model (CAPM) equation that shows relationship between return of a stock and beta coefficient. An underpriced security means that it is sold below its intrinsic value hence its rate of return is higher than the return calculated by CAPM. Since the existing rate of return is higher, it will plot on the right side of the security market line which means it's above it.