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Dear sir,
Regarding the lecture on capital asset pricing model, the part on alpha values, there is a part where you say that the share is undervalued. Why is this so? I haven’t understood that.Thanks
The share price is determined by the shareholders required rate of return. The higher the required return the lower the market value (and vice versa).
The required return should be determined by CAPM, and will be in the longer term, but day by day it might be higher or lower than it should be.
If the return is higher than it should be, then the market value will be lower than it should be – i.e. it will be undervalued.
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