Question

If a security is underpriced (i.e. intrinsic value > market price), then what is the relationship between its market capitalization rate (k) and its expected rate of return (EHPR)? Briefly explain your answer.

(if you can point out all of the points needed to answer this so I can turn that into 400 words)

[For this theoretical sub-question a word limit of 400 word is required.]

Answer 1

when the security is underpriced the market capitalisation will be less than the expected return thats why the securities having positive alpha that means having the more expected return than the market capitalisation rate are considered to be over priced. the market capitalisation rate is the theorical rate of return expected from the security while the expected return is the actual return provided by the security.