Perfectly priced stock
If (hypothetically), a stock is perfectly priced (and creating shareholder value), is your expected return simply the discount rate?
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Bunp
I believe it should be the cost of equity if you are an equity investor.
I don't think so. If by "discount rate" you are talking about either the cost of equity (Ke) or the rate at which the Fed lends to banks, neither one is a good reflection of an investor's most likely return on a stock "priced to perfection." There's no (to my knowledge) official definition of "priced to perfection" but as a practical matter, it generally means that investors are ignoring all risk to the security. Mathematically that means the Ke calculation, instead of risk free+risk premium*beta, is just risk free x beta, with risk free usually being treasuries. (One could further argue that something priced to perfection is also ignoring beta).
Yes, that is correct.
Your expected return would be the theoretically perfect cost of equity (which we typically use capm to approximate).
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