FRM Part II · FRM Exam Part II · Alpha (and the Low-Risk Anomaly)
Under the CAPM, which statement about a security that plots above the security market line is correct?
A security plotting above the security market line has a positive alpha: its expected return is higher than the CAPM requires for its beta. This signals it is underpriced relative to the model, and says nothing about its beta level or total volatility.
- AIt has a positive alpha, meaning its expected return exceeds the return required for its betaCorrect
- BIt has a beta greater than one
- CIt has lower total volatility than the market
- DIt has a negative alpha because it is underpriced
Explanation
A point above the security market line offers more expected return than compensation for its systematic risk, so alpha is positive and it is underpriced. Position relative to the line says nothing about whether beta exceeds one or about total volatility.
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