馃攳
(18 of 20) Ch.13 - Capital Asset Pricing Model (CAPM): underpriced & overpriced assets - YouTube
Channel: unknown
[0]
Okay, then, let's look at this graph again.
[5]
What if we are given some information on a
company stock?
[10]
We know the beta, we know the return on it,
and we realize that the return is actually
[17]
higher than the return that would be on the
security market line, right?
[24]
So, what if we have a company whose stock
has a combination of beta, an expected return
[32]
that lies above the line?
[34]
When a stock lies above the security market
line, it means that the return is better than
[44]
it should be for this amount of beta, systematic
risk.
[50]
Is it a good thing for investors?
[53]
Of course, because they're paying some money
to buy a share and they're compensated more
[59]
than they should be compensated for the kind
of, you know fluctuations and returns that
[65]
they are getting with their purchase.
[68]
So, this stock will be very popular, in high
demand.
[71]
And high demand means the price will rise.
[75]
If the price rises, then eventually, things
will stabilize.
[80]
Because you will be paying more money today
and you know, everything you get in the future
[88]
like the dividends will become sort of a lower
percentage of what you paid, which is how
[95]
you calculate the return.
[97]
So, the return will drop, and graphically,
the return dropping means they're moving down,
[105]
straight down toward the security market line.
[108]
And eventually the market will sort of stabilize
itself.
[113]
And the price will rise high enough to make
the return fall low enough so that the point
[123]
reaches the security market line.
[126]
And this is where the kind of the market equilibrium
will occur.
[130]
And so, the fact that currently this stock
has a better return than it should implies
[138]
that the price is too low.
[144]
And we say that this stock is currently underpriced.
[147]
So, above the line underpriced.
[151]
And the opposite will happen if the information
we are given indicates that a company stock
[158]
lies below the line.
[160]
This is when everything is reversed.
[163]
The investors are compensated inadequately
for the amount of systematic risk or fluctuations
[172]
in returns that cannot be controlled by the
investor.
[176]
Right?
[178]
So, they are not arm compensated enough for
the amount of risk that they are accepting
[187]
when they buy this company's shares.
[192]
And that makes the stock kind of you know
unpopular.
[198]
The price will drop so that investors get
interested in buying the stock.
[203]
If you pay less for the stock now, then everything
you get in the stock later in the future,
[210]
like the dividends, mathematically will mean
a higher percentage of what you're paying
[217]
for the stock now, which is exactly how we
calculate return.
[222]
And so, that means that as the price starts
falling, the return starts rising.
[228]
And graphically, the point that was under
the security market line, will start climbing
[235]
up and slowly reaching the security market
line.
[240]
And the equilibrium occurs when the point
is exactly on the line.
[245]
So, for this amount of beta we have the right
compensation for it in the form of expected
[253]
return.
[254]
And so, the fact that currently the price
is too high and will need to fall, it means
[263]
that this stock is currently overpriced.
[266]
So, to summarize, any point about the line
means the stock is underpriced.
[273]
Any point under the line, means the stock
is overpriced.
Most Recent Videos:
You can go back to the homepage right here: Homepage