Question

What does it mean when the required return under the capital asset pricing model is equal to the required return under the dividend valuation model?

Answer 1

The required rate of return under Capital Asset pricing model indicates the expected rate of return from the security. When this required rate of return i.e, required rate of return under capital Asset pricing model is used as the required rate of return under the dividend valuation model then the security will be fairly valued i.e, valued at Par. As the required rate of return and the expected return of the security is on equilibrium, there will not be any under or over valuation of the stocks.