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CFA Level I · CFA Level I Exam · Equity Analyst Research Reports

An analyst's valuation gives an intrinsic value of 60 per share for a stock trading at 48. The brokerage's rating scale assigns Buy to an expected 12-month total return above 15%. The stock pays no dividend and the analyst's 12-month price target equals intrinsic value. The rating most likely assigned is:

The stock most likely receives a Buy rating. With no dividend and a target of 60 against a price of 48, the expected 12-month return is 12/48, or 25%, which is above the 15% Buy threshold. A price below intrinsic value signals undervaluation, not a Sell.

  1. ABuy, because the expected return is 25%Correct
  2. BHold, because the expected return is below 15%
  3. CSell, because the price is below intrinsic value

Explanation

Expected return = (60 - 48)/48 = 25%, which exceeds 15%, so Buy. Sell would apply to an overvalued stock, not an undervalued one. Hold would require a return below the Buy threshold.

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