This sounds like a dumb question but I am having a hard time getting my head around this topic.
I get that the differnce between an estimated internsic value and the market price is the percived mispriing and that the mispricing is made up of two parts and the formula is as follows
VE - P = (IV - P) + (VE - IV)
What I don’t get is if intrinsic value minus market price (IV - P) is zero then how can VE - P be anyting other than zero? I mean this formula would suggest that if IV - P is zero and your estimate minus the intrinsic value (VE - IV) is a positive number then VE - P is positive.
How can that be? Sorry if its a dumb question. Maybe I am thinking too hard about it.
I’ve never seen that formula but is it supposed to be saying that the return on an asset is made of of the expected return, + a return based on the mis-pricing correcting itself? Theres another formula in the CFAI books for that, can’t think of it off the top of my head.