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According to the Capital Asset Pricing Model (CAPM), correctly priced securities:

A. have zero alphas
B. have positive betas
C. have positive alphas
D. have non-zero alphas
E. have negative betas

1 Answer

6 votes

Answer:

A) have zero alphas

Step-by-step explanation:

Stock's alpha show show much they have over or under performed in relation to similar peer stocks. But if the stocks were correctly priced, then alpha should be 0 since no variation, either positive or negative should occur. Alpha basically measures the error in the stock's valuation. It is always better to have positive alphas because if you make a mistake then hopefully is in your favor, but alphas can also be negative and that equals unexpected losses.

This is why the CAPM model only considers beta in its calculation.

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