- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 4. Multiplier Models
CFA Practice Question
If an asset seems to be undervalued relative to a comparison asset or group of assets, the asset ______
II. may be undervalued.
III. may be overvalued.
I. is expected to outperform the comparison asset or assets on a relative basis.
II. may be undervalued.
III. may be overvalued.
A. I and II
B. I and III
C. I, II and III
Explanation: The word "relative" is necessary. The asset may be overvalued on an absolute basis if the comparison asset or assets themselves are not efficiently priced.
User Contributed Comments 7
User | Comment |
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shival | tricky question |
toto123 | still doesnt make sense |
at0899 | pretty obvious why its I but the key to this is the "relative" basis so while it may look cheap compared to its peers, this stock could be overvalued on an absolute basis. i.e. tech bubble 1999. |
Sam123456 | Very good clarification, at. |
birdperson | in the words of Kevin Garnett, "ANYTHING IS POSSIBLE!!!" |
ascruggs92 | The asset "seems" to be undervalued "relative" to a comparison group. The language used to makes it clear that the value being place on this asset is subjective. For that reason, all three answers provided are distinct possibilities. |
pires100 | birdperson, thank you I needed that! haha |