I’m confused with the answer provided.
A snippet of the question:-
“An active investment manager attempts to capture positive alpha.”
…which of the following sources of perceived mispricing do active managers attempt to identify?
Based on the text in section 2.1.1 intrinsic value, a perceived mispricing is the difference between estimated intrinsic value and the market price of an asset.
Hence, the answer should be the difference between estimated intrinsic value and market price. However, the answer provided is intrinsic value and market price.
Need help with the confusion!
Statement 2 concedes that a portfolio manager cannot observe intrinsic value; therefore, the best one can do is to use estimated intrinsic value.
You have to read the statements.
Thanks for the reply!
However the answer provided is A. Intrinsic value and market price instead. It is through reading the statement that led me to think that the answer would also be B. estimated intrinsic value and market price.
Still wondering why the answer is intrinsic value instead of estimated intrinsic instead.
I suppose that they’re saying that the manager is attempting to identify a mispricing between intrinsic value and market value by means of a difference in price between estimated intrinsic value and market value.
Not as clear a question as they’d like.
unobservable intrinsic value and market price.
True mispricing is the difference between the asset’s true but unobservable intrinsic value and its market price that contributes to excess risk-adjusted return (alpha) sought by active managers.
The correct answer is: unobservable intrinsic value and market price.