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.

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