CFA Practice Question

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CFA Practice Question

If an investor is more accurate in estimating the value of a stock, then:

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.
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