A stock with returns above the SML line is considered as undervalued stock because: E(R) 0 O Undervalued stocks o M E(RM) R Overvalued stocks O 0 B 1 Systematic risk This stock provides lower returns than what is expected by CAPM based on its risk. The stock has lower returns based on its riskiness. The stock provides higher returns than the risk free rate. This stock provides higher returns than what is expected by CAPM based on its risk