r=12 ;expected return=10 is the stock under valued or overvalued
sorry meant to say over the market paying more than you think it is worth
swaption is right
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.
come on corrected myself at exact time swap answered lol
If you want to quantify it, it may make it easier since it’s not intuitive: Expected - Required If negative -------> overvalued
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.