A sell recommendation should be made to a security when a. its expected return i

Question

A sell recommendation should be made to a security when a. its expected return is less than its required (CAPM) return and its intrinsic value is less than its market price. b. its expected return is greater than its required (CAPM) return and its intrinsic value is less than its market price. c. its expected return is greater than its required (CAPM) return and its intrinsic value is greater than its market price. d. its expected return is less than its required (CAPM) return and its intrinsic value is greater than its market price.

Explanation / Answer

Correct option is > b. Its expected return is greater than its required (CAPM) return, and its intrinsic value is less than its market price.

It makes sense to sell the security, when the expected return is greater than calculated CAPM return and its intrinsic value is less than its market price.

If stock is giving higher return than its actual return as per CAPM implies that the stock return will fall in future and also to be noted that its intrinsic value also not supporting its market prices at same time.

This stock return and value would fall in future.

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