Final answer:
ABC Company's stock earned a higher return than expected based on the SML, meaning it would be plotted above the SML indicating a positive alpha of 1%. This suggests that the stock outperformed the market's expectations, demonstrating a good investment over the past year.
Step-by-step explanation:
The question is asking about the security market line (SML), which is a graphical representation of the Capital Asset Pricing Model (CAPM). The stock of ABC Company earned a return of 10% this past year, while the expected return based on the SML was 9%. If a stock is plotted on the SML, its position is determined by its actual return compared to its expected return based on the market's risk. Since ABC Company's stock earned more than the expected return, it will be plotted above the SML. This indicates that the stock has a positive alpha, meaning it has performed better than what the CAPM would predict given its risk level.
Alpha is a measure of performance on a risk-adjusted basis. A positive alpha of 1% (10% actual return - 9% expected return) indicates that the investment has outperformed the market's expectations. In other words, it would be considered a better-than-expected investment for shareholders, implying that the investment manager's strategy has added value over the period.