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The security market line (SML) shows the relationship between beta and expected return. The following graph shows stocks' betas (B) and expected returns (u): SML
The security market line (SML) shows the relationship between beta and expected return. The following graph shows stocks' betas (B) and expected returns (u): SML E Not yet saved A D Um M ro B B 1 Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured. Which statement is NOT correct? a. Stock E has a zero excess return (a zero alpha). O b. Stock A is underpriced. c. The price of Stock D will fall, and the excess return of Stock D will rise. d. Rational investors should sell Stock B. O e. Stock C has zero diversifiable risk
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