1. Profile photo of tinashe says

    Well explained! I have always wondered what they meant in the news about negative alphas and all! So it means one should sell eventually as the stock price will eventually fall! nice, I think after this paper i should do some work in a Stock market. iam getting learned.

  2. avatar says

    I don’t really understand the relationship between the alpha and the market value. If the alpha is +1 (actual return = 11%) it could mean that the market value is 90 cents and the div is 10 cents (as in the given example) or the dividend is 11 which would make the market value to be equal to 100 cents. Why do we assume that the reason for the positive alpha is the market value and not dividends?

    • Profile photo of John Moffat says

      In theory the required return should be that given by the beta.

      The market value is determined by the expected dividends and the required return.

      So, for example, if beta gives a required return of 10% and the expected dividends are 10c a year, then the market value should be $1. Similarly if the required return is 10% and the dividend is 9c then the market value will be 90c.

      If the market value is different than what it should be on theory then it means that the actual required return is not what it should be per capm.
      The difference between what the required return actually is, and what it should be from capm is the alpha.

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