Question

If a security is overvalued in terms of the CAPM model, what will happen if investors come to recognize this overvaluation?

Answer 1

Normally, the  stock price is more than the predicted price, it is overvalued stock and stock price is less than the predicted price, it is undervalued stock.

Capital asset pricing model (CAPM) is the relationship between the systematic risk of a security and expected return. A security plotted below the security market line the stock is overvalued.

And also CAPM model value is greater than the expected return of security its called stock is overvalued. And the value is less than the expected return stock is undervalued.