properly valued or not?

Reference to CFAI text Volume 4 Reading 51 page 266; Exhibit 8 suggests that stock A estimated return minus required return is 0.20 and they termed it as properly valued. No range is mentioned in the text. What would be evaluation if the difference estimated return minus required return is 0.6 - can we call it properly valued (anything less than 1). What is the limit - if any.

No range is mentioned in the text. What would be evaluation if the difference estimated return minus required return is 0.6 - can we call it properly valued (anything less than 1). What is the limit - if any. You’re talking about CAPM problems. Did you factor in the beta with the required rate of return? If you have an example I could walk you through it.

Estimated return calculated from SML using BETA. This means that O.2 above SML , to me it is still undervalued (although marginally)but CFA text taking it properly valued. I scored above 70 in 5 section still failed. This time i wont leave a single point i am asking from exam prespective.

That seems incorrect, I’ll look at the CFA text about this. If a security is over the SML line, it means per unit of risk one is getting excess return than the market portfolio.

Yes, to me it looked wrong but getting failed made be low in confidence . Anyways thanx

right estimated return>actual retrun(sml) ; security is undervalued

level1_dec Wrote: ------------------------------------------------------- > right estimated return>actual retrun(sml) ; > security is undervalued EXACTLY. a higher cost of capital shrinks the value of the asset. this will definitely be on the test. know it

IMO, This could be properly valued if transaction costs are taken into consideration. When we consider transaction costs, SML is not a line but a band. Otherwise this has to be incorrect. Even I had the similar concern about this.

charu_mulye Wrote: > This could be properly valued if transaction costs > are taken into consideration. > When we consider transaction costs, SML is not a > line but a band. > > correct

My only concern is from exam prespective, according to this problem provided in CFAI text, if the difference is 0.20, its properly valued. Can you guys please refer to CFAI text and suggest. I dont want to loose single marks