Question1.13 According to the Capital Asset Pricing Model (CAPM), in a disequilibrium, overpriced securities have ______ None of the options is correct. positive betas. zero alphas. negative betas. positive alphas. ResetMaximum marks: 2.5 Flag question undefinedSingle choice
A
None of the options is correct.
B
positive betas.
C
zero alphas.
D
negative betas.
E
positive alphas.

Question

Question1.13 According to the Capital Asset Pricing Model (CAPM), in a disequilibrium, overpriced securities have ______ None of the options is correct. positive betas. zero alphas. negative betas. positive alphas. ResetMaximum marks: 2.5 Flag question undefinedSingle choice

A

None of the options is correct.

B

positive betas.

C

zero alphas.

D

negative betas.

E

positive alphas.

BlackTom AI · Accepted Answer

Jensen’s alpha for security i is αi = E[Ri] − [Rf + βi (E[Rm] − Rf)], so CAPM equilibrium implies αi = 0 for all securities. In disequilibrium, mispricing shows up as nonzero alpha: an overpriced security has an expected return below the CAPM-required return, hence a negative alpha.

1) Relevant concepts
- CAPM required return: R_required = Rf + βi (E[Rm] − Rf).
- Jensen’s alpha measures abnormal return: αi = E[Ri] − R_required.
- Equilibrium under CAPM: αi = 0. Disequilibrium → αi ≠ 0; sign indicates over- or underpricing.

2) Step-by-step reasoning
- Write the formula: αi = E[Ri] − [Rf + βi (E[Rm] − Rf)].
- If a security is overpriced, its current price is too high, so its expected future return E[Ri] is lower than the CAPM-required return.
- Therefore E[Ri] < Rf + βi (E[Rm] − Rf) ⇒ αi < 0 (negative alpha).

3) Intermediate calculation example (symbolic)
- Suppose Rf = 2%, E[Rm] = 8%, βi = 1. Then R_required = 2% + 1*(8%−2%) = 8%.
- If the security is overpriced its actual expected return might be E[Ri] = 6%. Then αi = 6% − 8% = −2% (negative).

4) Why the correct answer is correct
- The logically correct CAPM implication for an overpriced security is a negative alpha. None of the listed choices is “negative alphas,” so none of the options matches the correct CAPM implication.

5) Why the other options are incorrect
- “positive betas”: Beta measures systematic risk, not mispricing; overpricing does not imply beta is positive. 
- “zero alphas”: Zero alpha is an equilibrium result; disequilibrium implies nonzero alpha. 
- “negative betas”: Overpricing does not require a negative beta; beta sign depends on covariance with the market, not price misalignment. 
- “positive alphas”: Positive alpha corresponds to underpriced securities (expected returns above CAPM required), the opposite of overpriced.

6) Conclusion
Because CAPM implies an overpriced security should have a negative alpha and that specific choice is not among the options, the correct choice from the provided list is “None of the options is correct.” This matches the provided answer.

Question1.13 According to the Capital Asset Pricing Model (CAPM), in a disequilibrium, overpriced securities have ______ None of the options is correct. positive betas. zero alphas. negative betas. positive alphas. ResetMaximum marks: 2.5 Flag question undefinedSingle choice

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