CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
Which of the following is most likely the purpose of equity valuation for a portfolio manager who believes markets are not perfectly efficient?
The purpose is to identify securities whose prices differ from intrinsic value. If markets are not perfectly efficient, estimating intrinsic value lets the manager find overvalued or undervalued securities, which requires forecasting fundamentals and cannot guarantee any return.
- AIdentify securities whose prices differ from intrinsic valueCorrect
- BGuarantee a return equal to the risk-free rate
- CEliminate the need to forecast company fundamentals
Explanation
Valuation estimates the intrinsic value of securities so a manager can find those that are mispriced relative to market price and act on the difference. Valuation cannot guarantee returns, and it requires forecasting fundamentals rather than removing that need.
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