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Why if the return using capm is higher than the investors return is the security underpriced? I can’t seem to understand the logic behind this. Thank you 🙂
It is under-priced, not over-priced – either you have misread the statement wherever you read it, or someone has made a typing error.
The MV depends on the investors required rate of the return. The higher the required rate of return then the lower the MV will be (and vice versa), – I explain the reason for this in my free lectures.
If the current required rate of return is lower than what is should be using CAPM, then the MV will be higher than it should be. In future the required rate of return will increase to that determined by CAPM and therefore the MV in the future will reduce.
Hello. I have put under priced in my question.. I will look at your lectures again 🙂
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