CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
Which of the following is the most appropriate reason an analyst might use relative valuation alongside an absolute valuation model?
An analyst most appropriately uses relative valuation to check whether intrinsic value estimates from an absolute model are consistent with how the market prices comparable companies. It offers a market-based cross-check but guarantees nothing about price convergence.
- ATo remove the need for any forecasts
- BTo check whether intrinsic value estimates are consistent with how the market prices similar companiesCorrect
- CTo guarantee that the stock price will converge to intrinsic value
Explanation
Relative valuation gives a market-based cross-check on the intrinsic value from an absolute model. It does not remove the need for forecasts such as earnings, and it cannot guarantee price convergence.
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