CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
An analyst's estimate of a stock's value differs from its market price. Which statement best describes the market's pricing relative to the analyst's view, if the analyst believes the market is informationally efficient?
The difference most likely reflects an error in the analyst's estimate. If markets are efficient, prices already incorporate available information and approximate intrinsic value, so a divergence points to problems in the analyst's inputs or model rather than to a true mispricing.
- AThe difference most likely reflects an error in the analyst's estimate.Correct
- BThe analyst should expect the gap to be closed by the market within one day.
- CThe stock is most likely mispriced and should be bought immediately.
Explanation
In an efficient market, price reflects available information and equals intrinsic value, so a gap more likely signals a flaw in the analyst's inputs or model. A believer in efficiency would not assume mispricing, nor expect a fixed one-day correction.
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