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parott

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tT
发表于 2011-7-11 19:40 | 只看该作者

Returns comparison question

comparison, question, expected, return
Stocks expected return is 10% and CAPM return calculated is 11%. Is the stock overvalued or undervalued?
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kkn006

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2#
发表于 2011-7-11 19:40 | 只看该作者
undervalued! You should Buy it.

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onelife1

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3#
发表于 2011-7-11 19:40 | 只看该作者
really?....I thought that if the stock was required to earn 11% through the CAPM and it was only expected to return 10% you would not buy it...

I guess I need to go back to my books from L1?

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Otabek

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4#
发表于 2011-7-11 19:40 | 只看该作者
You don't need to do the reading, Salman does.

The stock is overvalued because a lower expected return than what CAPM suggests means you're taking on too much inherent risk for too low of a return.

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iteracom

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5#
发表于 2011-7-11 19:40 | 只看该作者
Verse....Tks...I was trying to be diplomatic!

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huangxiaoxie

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6#
发表于 2011-7-11 19:40 | 只看该作者
That is it.....Think of it this way......the capm is the required return...as you have shown above the expected is above required..therefore you would buy the "undervalued" stock.

Note: to avoid confusion,,,,,you now have the 11 & 10% the different way from your first post in this thread.



Edited 1 time(s). Last edit at Tuesday, May 3, 2011 at 03:35PM by perdition.

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smuggycfa

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7#
发表于 2011-7-11 19:40 | 只看该作者
overvalued. you're only getting 10% when CAPM is calling for 11%. the alpha is -1, per your 1st post. if the alpha is positive, per your 2nd post, then it will undervalued and should be bought.



Edited 1 time(s). Last edit at Tuesday, May 3, 2011 at 03:39PM by jgrandits.

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xilinx_altera

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8#
发表于 2011-7-11 19:40 | 只看该作者
Perdition, thanks for the correction. The equation should be:

Expected return = Alpha + CAPM return ==> 10 = -1 + 11

This is -ve alpha ==> overvalued. Thanks!

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