Final answer:
In the context of CAPM, overvalued securities are characterized by a negative alpha, indicating that their price is higher than the return justified by their level of risk.
Step-by-step explanation:
According to the Capital Asset Pricing Model (CAPM), an overvalued security would be one that has a higher price than what the model predicts it should have given its risk.
CAPM includes a term known as alpha, which represents the excess return on a stock compared to the benchmark return predicted by the CAPM. A positive alpha would indicate a security has performed better than its expected return, while a negative alpha suggests it has underperformed.
Therefore, overvalued securities should have a negative alpha, because their price is higher than justified by the predicted return, signaling potential overvaluation.