Question

1. According to the capital asset pricing model a, a security with a _____.

A. zero alpha is considered a good buy

B. negative alpha is considered a good but

C. negative alpha is considered over priced

D. positive alpha is considered overpriced

Answer 1

Statement A is incorrect as a security with zero alpha is considered to be fairly priced. A good buy would be a stock with a positive alpha.

Statement B is incorrect becasue negative alpha destroys wealth and cannot be a good buy

Statement C is correct as an overpriced security has a greater required return than the expected return. This makes the secruity to be overpriced

Statement D is incorrect as a positive aplha stock is underpriced

Hence, Statement C is correct