- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 21. Return Concepts
- Subject 1. Return Concepts
CFA Practice Question
If an investor is more accurate in estimating the value of a stock, then:
II. The required return is higher than the expected return.
III. There will be most likely a convergence of value to price.
I. Her expected return is higher than the required return.
II. The required return is higher than the expected return.
III. There will be most likely a convergence of value to price.
Correct Answer: I only
III: There will be most likely a convergence of price to value.
User Contributed Comments 4
| User | Comment |
|---|---|
| amamed213 | can someone explain more please ? |
| mishis | I don't agree. I. only when it's undervalued, what about the contrary? an investor can be more accurate and estimate a lower value making it overvalued, and then expected return is lower than required return, hence you don't invest in that asset |
| hks101 | mishis, if it's the contrary, the investor can short the stock. |
| CIDB | I think it's trying to say she is more accurate which produces alpha. Her expected return is required return + alpha. |