CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
A stock has a market price of 40. An analyst estimates its intrinsic value at 46, while the market consensus estimate of intrinsic value is 40. Which view is most likely consistent with the analyst's belief that the stock is mispriced?
The analyst believes the market's estimate of value is too low. Price reflects the consensus value of 40, and the analyst's own estimate is 46, so if the analyst is right the stock is undervalued. Mispricing exists only when the analyst's estimate differs from the market's.
- AThe analyst's estimate is wrong because price equals consensus value
- BThe analyst believes the market's estimate of value is too lowCorrect
- CThe stock is correctly priced because the analyst's estimate is higher
Explanation
The market price reflects the consensus estimate of value. If the analyst's estimate of 46 is more accurate, the market estimate of 40 is too low and the stock is undervalued. Option A assumes the analyst must be wrong, and C wrongly says a higher estimate means correct pricing.
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