Where should any account with positive ex-post alpha be positioned on the SML line?

When evaluating the Capital Asset Pricing Model (CAPM) and the Security Market Line (SML), it is important to understand what ex-post alpha indicates. A positive ex-post alpha suggests that an investment has outperformed the expected return given its level of systematic risk, as measured by beta.

The SML represents the relationship between expected return and systematic risk (beta) in a well-functioning market. A security's position relative to the SML provides insight into its performance. If an account or security has a positive ex-post alpha, it means that its actual return exceeds what would be predicted by its risk profile on the SML. In this context, positioning an account with positive ex-post alpha above the SML line signifies that it is providing higher returns for the given level of risk compared to the market's expectations.

This outperforming characteristic allows investors to identify securities that may be more attractive than others, given their risk levels. Ultimately, securities positioned above the SML are considered to be generating excess returns and are often sought after by investors looking for better performance relative to their risk exposure.