Stocks expected return is 10% and CAPM return calculated is 11%. Is the stock overvalued or undervalued?作者: kkn006 时间: 2011-7-11 19:40
undervalued! You should Buy it.作者: onelife1 时间: 2011-7-11 19:40
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?作者: Otabek 时间: 2011-7-11 19:40
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.作者: iteracom 时间: 2011-7-11 19:40
Verse....Tks...I was trying to be diplomatic!作者: huangxiaoxie 时间: 2011-7-11 19:40
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.作者: smuggycfa 时间: 2011-7-11 19:40
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.作者: xilinx_altera 时间: 2011-7-11 19:40
Perdition, thanks for the correction. The equation should be:
