    E(rM) - rf = slope of SML           M =1.0       Because the security market line is the graphic representation of the expected return-beta relationship, "fairly priced" assets plot exactly on the SML; that is, their ex- pected returns are commensurate with their risk. Given the assumptions we made at the start of this section, all securities must lie on the SML in market equilibrium. Nevertheless, we see here how the CAPM may be of use in the money-management industry. Suppose that the SML relation is used as a benchmark to assess the fair expected return on a risky asset. Then security analysis is performed to calculate the return actually expected. (Notice that we depart here from the simple CAPM world in that some investors now apply their own unique analysis to derive an "input list" that may differ from their competitors.) If a stock is perceived to be a good buy, or underpriced, it will provide an expected return in ex- cess of the fair return stipulated by the SML. Underpriced stocks therefore plot above the SML: Given their betas, their expected returns are greater than dictated by the CAPM. Overpriced stocks plot below the SML. The difference between the fair and actually expected rates of return on a stock is called the stocks alpha, denoted . For example, if the market return is expected to be 14%, a stock has a beta of 1.2, and the T-bill rate is 6%, the SML would predict an expected return on the stock of 6 1.2(14 - 6) 15.6%. If one believed the stock would provide an expected return of 17%, the implied alpha would be 1.4% (see Figure 9.6). One might say that security analysis (which we treat in Part V) is about uncovering securities with nonzero alphas. This analysis suggests that the starting point of portfolio management can be a passive market-index portfolio. The portfolio manager will then in- crease the weights of securities with positive alphas and decrease the weights of securities with negative alphas. We show one strategy for adjusting the portfolio weights in such a manner in Chapter 27.