1. Security X has an actual rate of return of 17.2% and a beta of 1.15. The SML looks like the following:

   According to the capital asset pricing model, security X is:

   1. fairly priced

   2. overpriced

   3. underpriced

   4. ambiguous, there is not enough information

2. Question 16

   2 Points

   Arbitrage pricing theory implies that if there is an arbitrage opportunity, an investor should short sell the expensive asset (low return) buy the cheaper asset (high return).

   1. True
   2. False