Question: 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

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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