The expected return of stock XYZ is greater than the return calculated using the CAPM. Is XYZ overvalued or undervalued?
Where is the expected return coming from? Market price? If the market is pricing a security higher than you calculate it to be then it would be overvalued.
if expected is greater that required ( using CAPM) the security is under valued
undervalued theoretically XYZ price should go up until its expected return will equal CAPM-based return.
maratikus Wrote: ------------------------------------------------------- > undervalued > theoretically XYZ price should go up until its > expected return will equal CAPM-based return. Thx for the explanation.