A security is considered "correctly priced" when it lies along which line?

A security is considered "correctly priced" when it lies along the Security Market Line (SML), which represents the relationship between the expected return of a security and its systematic risk, as measured by beta. The SML is a graphical representation derived from the Capital Asset Pricing Model (CAPM). It illustrates that there is a linear relationship between the expected return and the beta of securities, indicating that investors require a higher return for taking on additional risk.

When a security is positioned on the SML, it is deemed fairly valued, as its expected return compensates investors appropriately for the level of risk associated with it. If a security lies above the SML, it is considered undervalued or offering a higher return for its level of risk, while a position below the SML indicates that it is overvalued, providing a lower return than what would be considered acceptable for its risk level.

This concept is fundamental in finance as it helps investors evaluate whether to buy, sell, or hold a security based on its expected return relative to its risk profile.