According to the capital asset pricing model, a security with a ________.
A) negative alpha is considered a good buy
B) positive alpha is considered overpriced
C) positive alpha is considered underpriced
D) zero alpha is considered a good buy

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) suggests that the expected return on a security is equal to the risk-free rate plus a premium that is proportional to the security's beta (systematic risk). The alpha of a security is the excess return beyond what is predicted by the CAPM. A positive alpha indicates that the security is outperforming the market, and therefore considered underpriced. This would make it a good buy. Therefore, the best choice is C.

According to the Capital Asset Pricing Model, a Security with a ________