Hi all, If a stock is fairly priced as per Gordon growth model, then the stock price is expected to increase at growth rate,g. i.e. capital gains yield = g What would happen in the stock is not fairly priced i.e. over/undervalued? Stock price is over priced == > capital gains yield < g Stock price is under priced == > capital gains yield > g Am i correct? Thanks!
Gucci?
Chicago_Bull Wrote: ------------------------------------------------------- > > Stock price is over priced == > capital gains > yield < g > > Stock price is under priced == > capital gains > yield > g > I have not read the chapter yet, but what I think is: If Stock Price is overpriced, then Capital Gains Yield > g and vice versa. This is because, if Stock Price is overpriced, the difference in prices, when you bought the stock and its current market price would be higher. Because, current market price is overpriced. Thus, should give you a higher Capital Gains yield, when current price is overpriced. What is the book saying?
I’m not sure Capital Gains yield is the correct term to use here. What you’re referring to is based on CAPM, and is as follows: A stock is UNDER-priced if it’s return IS GREATER than its R®, and therefore it plots ABOVE the SML A stock is OVER-priced if it’s return IS LESS THAN its R®, and therefore it plots BELOW the SML I’ve never seen the book or Schweser use Capital Gains yield in calculating the return since that removes the effects of dividends whereas CAPM incorporates it. I could be wrong, but that’s my interpretation.
Are you referring to: Required Return = Divi Yield * Capital Growth?? (From equity reading 40?)