Question

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

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.**

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helpful.**

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