Why C is not correct?

CFA Level I
#1

Hello, correct answer is B, why not C?
Suppose that the future cash flows of an asset are accurately estimated. The asset trades in a market that you believe is efficient based on most evidence, but your estimate of the asset’s intrinsic value exceeds the asset’s market value by a moderate amount. The most likely conclusion is that you have:

  1. overestimated the asset’s risk.
  2. underestimated the asset’s risk.
  3. identified a market inefficiency.
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#2

The estimate of the asset’s intrinsic value is the present value of the future cash flows and the discounted rate is the asset’s risk you estimated.

If the estimated value is less than market value, it’s obviously that you underestimate the asset’s risk which is also the discounted rate.

Market efficiency usually refers to the efficiency of information dispersion. An efficient market is one where everyone could receive the entire information instantly and for no cost.

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#3

interesting question, this is from Equity right?

#4

yes

#5

To determine the security’s intrinsic value, DCF should be used.
Whilst the CFs are known, there is Required rate of return in the denominator, because of the efficiency of the market, “you have smaller denominator than market”.
So on, that is “underestimate the asset’s risk”
A is obviously incorrect.
C is impossible, because Required rate of return is based on judgement, whilst the efficiency of market is based on EVIDENCE