Assume a stock\'s risk and expected rate of return are plotted on a graph where

Question

Assume a stock's risk and expected rate of return are plotted on a graph where the y-axis is required rate of return and the x-axis is risk. Under which of the following conditions is the stock most likely to be sold (if owned) or not purchased?

A. The stock's plot falls on the security market line.
B. The stock's plot falls below the security market line.
C. The stock's plot falls above the security market line.
D. The stock's plot falls at the risk-free rate on the y-axis.
E. The information provided is insufficient to answer the question.

Explanation / Answer

B. The stock's plot falls below the security market line.

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