We used CAPM to determine a theoretically appropriate required rate of return of a stock A. If the E(Ri) from CAPM is 10%. In the real market, E(R) = 12%. We can say the the price of stock A is undervalued. (From CFA1, don't know if it's plausible in the real world equity market analysis) Questions: 1. What does the E(Ri) really represent. Say if a stock is $10 in t1. It's expected to be $11 in t2 with E(Ri) =10% ? 2. Why stock A is undervalued? An explanation is that it's related to discounted cash flow. Is it about the r-g in DDM model?
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