CFA Practice Question

There are 57 practice questions for this study session.

CFA Practice Question

The market price of a stock is $20 now. The required rate of return is 10%. The intrinsic value, however, should be $22. If the price is going to converge to value in one year, then the expected rate of return for the period will be:

A. 10%.
B. 15%.
C. 20%.
Correct Answer: C

The stock is undervalued by $2, or 10%. The expected rate of return = required return 10% + 10% = 20%.

User Contributed Comments 7

User Comment
VenkatB How is it 20% ?

I think it should be (22-20)/20 = 10%
JimM Took me a moment.

The expected required return is what is given when the stock is purchased at a price equal to intrinsic value. If the price is below intrinsic value, then the return to get it up to that value is added to the required return to get expected return.
bodduna ER = RoR + Exp.Alpha.
price convergence to value.
srki Good question
rodney176 Good question, separating required return from alpha
ashish100 Someone else take this mark meldrum to confirm and paste the results here but,
Price convergence to value (10%) is not the alpha that's shown on the correct formula given by bodduna

return = cap gains + divs
Return = required + alpha

So return here is 10 %
khalifa92 E(R)= r + (V0-P0/P0)

they just gave us the components names
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