Returns comparison question comparison, question, expected, return

parott

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

xilinx_altera

Perdition, thanks for the correction. The equation should be:

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

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

iteracom

Verse....Tks...I was trying to be diplomatic!

huangxiaoxie

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.

smuggycfa

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.

kkn006

undervalued! You should Buy it.

onelife1

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?

Otabek

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.