CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
An analyst values a stock at 48 per share using a model. The market price is 40. The analyst believes the true intrinsic value is 45 per share, and the model overstates value by relying on an aggressive growth input. The difference between the analyst's intrinsic value and the market price is best described as the stock's:
The gap is an estimated mispricing of 5 per share. Mispricing is measured as intrinsic value minus market price, which is 45 minus 40. The 48 model output includes an aggressive input, so the difference to the market price of 8 overstates the real gap.
- Aestimated mispricing of 5 per shareCorrect
- Bmodel error of 8 per share
- Cestimated mispricing of 8 per share
Explanation
Intrinsic value (45) minus market price (40) gives a mispricing of 5. The model's 48 includes an error of 3 versus 45, so the 8 gap mixes model error and mispricing. Hence 5 is the mispricing based on the best intrinsic estimate.
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