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Security Market Line: Application


 

  • Linear relation of risk and return plotted on a graph is called Security Market Line (SML)
  • SML determines - if an asset is expected to offer commensurate return w.r.t. potential risk
  • Single stock return is plotted versus its security's risk
    • If it is above SML, stock is undervalued because market expects higher return
    • If it is below SML, stock is overvalued because market expects lesser return




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