If any security is above sml then as per capm it means the security is
Answers
Answer:
The security market line (SML) is a graphical representation of the CAPM formula. ... Conversely, if a security's expected return versus its systematic risk is plotted below the SML, it is overvalued because the investor would accept a smaller return for the amount of systematic risk associated
Answer:
Undervalued
Any security that is charted higher than the SML is considered to be undervalued. A security that is overpriced is below the line. The CAPM is a tool used by fundamental analysts to identify risk premiums, investigate company finance choices, identify undervalued investment possibilities, and contrast businesses in various industries.
Explanation:
The link between an asset's expected return and beta is depicted by the Capital Asset Pricing Model or CAPM. Securities should provide a risk-adjusted market premium, according to the fundamental premise of the CAPM. The CAPM formula may be used to determine the two-dimensional correlation between anticipated return and beta, which can then be represented graphically by a securities market line, or SML. Any security that is charted higher than the SML is considered to be undervalued. A security that is overpriced is below the line.
The CAPM is a tool used by fundamental analysts to identify risk premiums, investigate company finance choices, identify undervalued investment possibilities, and contrast businesses in various industries.
Market economists may examine investor behaviour using the SML graph. The SML may be used to decide if assets should be added to a market portfolio, which is perhaps the most crucial. Maximizing predicted profit in relation to market risk is the objective.
Difference Between CML and SML
The capital market line, or CML, is another significant graphical relationship connected to the CAPM. Although it is simple to mistake the CML with the SML, the CML exclusively addresses portfolio risk. The SML addresses market risk or systematic risk. Traditionally, choosing the correct securities may reduce a portfolio's risk. With systematic risk or SML, this is not true.
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