CAPM

CFA Level II
#1

r=12 ;expected return=10 is the stock under valued or overvalued

#2

under

#3

overvalued?

#4

sorry meant to say over the market paying more than you think it is worth

#5

swaption is right

#6

Required return = 12% (what it should be) Expected= 10% (what it will be) why the difference? because the stock is already higher in price, lowering the expected return as of this point in time. So the stock is Overpriced.

#7

come on corrected myself at exact time swap answered lol

#8

If you want to quantify it, it may make it easier since it’s not intuitive: Expected - Required If negative -------> overvalued

#9

I always picture the SML. The required return is derived using CAPM and is the minimum return investors will accept. If the expected return < required return (plots below SML), security is overvalued. If expected return > required return (plots above SML), security is undervalued.