CFA Level I · CFA Level I Exam · Equity Analyst Research Reports
An analyst values a stock at an intrinsic value of 66 per share. The current market price is 60. The firm's rating scheme assigns Buy to an expected total return above 12% over 12 months, Hold to 0% to 12%, and Sell to below 0%. Assuming the price converges to intrinsic value in 12 months and the stock pays no dividend, the rating most likely assigned is:
The stock is rated Hold. Convergence from 60 to 66 implies a 10% expected return with no dividend, which falls within the 0% to 12% band for Hold. It is below the 12% needed for Buy and above zero, so Sell is inappropriate.
- ASell
- BHoldCorrect
- CBuy
Explanation
Expected return = (66 - 60)/60 = 10%. This lies between 0% and 12%, so the stock is rated Hold. Buy would require more than 12%.
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