Intrinsic value

[patolin]

If intrisic value of a stock is greater than the current stock price. Is the stock over-value or under-value?

 

[pepp]

think hard, and dont post such question.

 

[map1]

under

 

[daj224]

pepp Wrote:
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> think hard, and dont post such question.


: )

 

[mcf]

But what about if the SML model implies a return which is below the expected return of the stock.. then is it overvalued or undervalued....

 

[mib20]

undervalued

 

[pepp]

mcf, he said intrinsic value. i am assuming he either used SML or DDM, or PE approach to come to it.

if the stock plots above SML, then short it. if it plots below it then go long.

 

[daj224]

mcf Wrote:
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> But what about if the SML model implies a return
> which is below the expected return of the stock..
> then is it overvalued or undervalued....


if CAPM > estimated rtn, it is overvalued.

dont mix up estimated and expected.

 

[mcf]

I still struggle with that. If the stock plots below the SML curve, it feels like that should be 'undervalued'. The theoretical implication of the SML line says "hey, you should be up here.. but you're down there.. you're under-valued"... but it's the exact opposite. It's killing me.

 

[daj224]

mcf Wrote:
-------------------------------------------------------
> I still struggle with that. If the stock plots
> below the SML curve, it feels like that should be
> 'undervalued'. The theoretical implication of the
> SML line says "hey, you should be up here.. but
> you're down there.. you're under-valued"... but
> it's the exact opposite. It's killing me.


look at the beta/rtn relationship. the SML is CAPM visualized pictorially. it will click

boom

 

[beingthatguy]

SML

overline- undervalue

Underline - overvalue

 

[th123]

The SML is the expected return plotted against beta, with risk free as the intercept

As Daj said, this is the sml is capm visually. So when you know these variables, use capm to derive return requirement.

If this is less than the expected return: ie if capm says 10% but your analysis says 15%--what would you do?

 

[SkipE99]

remember intrinsic means you did the calculations. you are smarter than the markets so what you calculate is the better answer