Would you be so kind to elaborate why the security with the expected return of 15% and required return of 13% (based on SML) is considered to be undervalued?
Suppose that the security is selling at $13/share, and has an expected return of 15%, or $1.95.
The required rate of return is only 13%, which would be that same return of $1.95 on a share price of $15.
So the security is undervalued by $2/share.
another way to think about this…
rate of return would be used to discount to arrive at the pv
if share cost 1$.
At 13% required return - pv = 1/1.13 which would be more than 1/1.15
so @ 15% it is undervalued.