Measuring industry mispricing: An empirical analysis of CAPM alphas for U.S. industry portfolios

This study examines industry-level valuation through the framework of the Capital Asset Pricing Model (CAPM) using monthly data for 49 U.S. industry portfolios from January 2000 to November 2025. First, a graphical analysis of total risk and return provides preliminary evidence of a positive risk–return relationship across industries. To isolate systematic risk, CAPM regressions are estimated to obtain industry betas and Jensen’s alphas. The Security Market Line (SML) is then used to assess whether industry returns are consistent with market risk exposure. The results indicate that while beta explains a substantial portion of return variation, several industries exhibit statistically meaningful positive or negative alphas, suggesting deviations from CAPM predictions. These findings highlight cross-industry differences in risk-adjusted performance and provide insights into industry valuation and the limitations of the single-factor model.