Question

when a stock has a positive alpha it means the stocks return lies: a. above the...

when a stock has a positive alpha it means the stocks return lies:

a. above the security market line

b. below the capital market line

c. has a beta of greater than 1

d. investor should increase the weight on this stock in her portfolio

e. nowhere, a stock can never have a positive alpha

Homework Answers

Answer #1

Correct Answer is option A
If the Stock has a Positive return, it means the stock is undervalued. Positive Alpha means stock has outperform te benchmark.
If the Security is plotted above the SML, it is consider that the stock is undervalued, secutity provides greater return.
If security is plotted below the SML, it is consider that the stock is overvalued.
Formula for SML -
Required rate of return = Risk free rate +(market return - Risk free rate)*Beta.

I hope this clear your doubt.

Feel free to comment if you still have any query or need something else. I'll help asap.

Do give a thumbs up if you find this helpful.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
If the risk/return performance of a stock lies above the Security Market Line, the stock is...
If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a: a. Positive expected return b. Positive covariance c. Positive correlation coefficient d. Positive alpha
An investor forms a portfolio of two stocks, Alpha and Beta. Information regarding the two stocks...
An investor forms a portfolio of two stocks, Alpha and Beta. Information regarding the two stocks is shown below: STOCK: Expected Return Standard Deviation Alpha 8.00% 30.00% Bravo 9.00% 50.00% The correlation between returns on Alpha and Bravo is 0.30. The investor will put 60% of her wealth in Alpha and the 40% of her wealth in Bravo. What is the standard deviation of the investor’s portfolio? 30.66% 27.66% 29.13% 31.17% 24.61%
1. If the risk/return performance of a stock lies above the Security Market Line, the stock...
1. If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a: a. Positive covariance b. Positive expected return c. Positive correlation coefficient d. Positive alpha 2. A bond has a 25-year maturity, an 8% annual coupon paid semiannually, and a face value of $1,000. The going nominal annual interest rate (rd) is 6%. What is the bond's price? A. $1,515.25 B. $1,000 C. $1,257.30 D. $1,255.67 3. A manager who...
You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming...
You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year. The market is expected to return 11.4% and T-bills return 3.8%. According to CAPM, which one of these statements is correct given this information? Multiple Choice The stock is currently underpriced The stock plots to the left of the market on a security market line graph The stock plots below the security market line The stock is currently underpriced. The stock plots to...
An investor currently holds the following portfolio of 4 stocks, each having equal weight: Stock Expected...
An investor currently holds the following portfolio of 4 stocks, each having equal weight: Stock Expected Return (rs) Beta A 13.2% 1.70 B 12.00% 1.5 C 6.0% 0.5 D 7.8% 0.8 a. What is the portfolio’s expected return? b. What is the portfolio’s beta risk? Is it more or less risky than the market? c. Is the portfolio more or less risky than the market? How do you know? The investor is not comfortable with holding a portfolio that has...
Which of the following statements is false? A When a stock’s alpha is not zero, investors...
Which of the following statements is false? A When a stock’s alpha is not zero, investors can improve upon the performance of the market portfolio. B An important conclusion of the CAPM is that only sophisticated investors with superior trading skills should hold the market portfolio (combined with risk-free investments). C The Sharpe ratio of a portfolio will increase if the investor buys stocks whose expected returns exceed their required returns, that is, if he buys stocks with positive alphas....
1.Stock A has a beta of 0.50 and Stock B has a beta of 1.25. Suppose...
1.Stock A has a beta of 0.50 and Stock B has a beta of 1.25. Suppose rf is 4% and Rm is 10%. a.Applying the security market line, determine the expected return for Stocks A and B. b.What is the expected return of an equally weighted portfolio of these two stocks?
Stock A has an expected return of 13% and a standard deviation of 22%, while Stock...
Stock A has an expected return of 13% and a standard deviation of 22%, while Stock B has an expected return of 15% and a standard deviation of 25%. If an investor is less risk-averse, they will be likely to choose… A. Stock A B. Stock B Stock A has a beta of 1.8 and an expected return of 12%. Stock B has a beta of 0.7 and an expected return of 7%. If the risk-free rate is 2% and...
STOCK   PERCENTAGE OF PORTFOLIO   BETA   EXPECTED RETURN 1 20% 0.95 16% 2 10% 0.90 13% 3...
STOCK   PERCENTAGE OF PORTFOLIO   BETA   EXPECTED RETURN 1 20% 0.95 16% 2 10% 0.90 13% 3 25% 1.15 20% 4 5% 0.70 12% 5 40% 1.55 25% (Portfolio beta and security market line​) You own a portfolio consisting of the following​ stocks:. The​ risk-free rate is 4 percent.​Also, the expected return on the market portfolio is 10 percent. a. Calculate the expected return of your portfolio. ​(​Hint: The expected return of a portfolio equals the weighted average of the individual​...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. a. Calculate each stock’s coefficient of variation. b. Which stock is riskier for a diversified investor? c. Calculate each stock’s required rate of return. d. On the basis of the two...