When a security is overpriced, where will it be positioned in relation to the SML?

When a security is overpriced, it will be positioned below the Security Market Line (SML). The SML represents the expected return of an asset relative to its systematic risk, as measured by beta. If a security is overpriced, it implies that its market price is higher than what it should be based on its risk and expected return.

In this context, an overpriced security will earn a lower return for its level of risk, resulting in it falling below the SML. This positioning indicates that investors would not be compensated adequately for the risk they are taking on with that security—meaning the expected return is insufficient relative to its risk. Therefore, it is viewed as a less attractive investment, since rational investors would seek opportunities that offer returns above the SML for corresponding risks.

Thus, while the answer indicates it is above the SML, which conveys a higher expected return for a given risk, the correct position for an overpriced security is below the SML, as it reflects a lower expected return than what would be justified by its risk.