The Capital Asset Pricing Model (CAPM) for asset i is

E(R_i) = R_f + \beta_{i} (E(R_m) - R_f)

It can be used for asset pricing

We can compare the expected/required rate of return, E(R_i), calculated using CAPM, to the asset's estimated rate of return, based on either fundamental or technical analysis techniques (including P/E, M/B etc), over a specific investment horizon to determine whether it would be an appropriate investment.

Assuming that the CAPM is correct, an asset is correctly priced when its estimated price is the same as the present value of future cash flows of the asset, discounted at the rate suggested by CAPM. If the observed price is higher than the CAPM valuation, then the asset is undervalued (and overvalued when the estimated price is below the CAPM valuation)

Questions:

1. I was wondering how "future cash flows of the asset" are predicted? Are they also predicted using fundamental and/or technical analysis?

2. It seems like calculating expected/required rate using CAPM does not belong to either fundamental or technical analysis, does it? If indeed not belong, how are fundamental and technical analysis different from CAPM? I just would like to have some big picture.

3. In the quote, two kinds of prices have been mentioned:

   • the expected/required rate of return, E(R_i), calculated using CAPM,

   • the asset's estimated rate of return, based on either fundamental or technical analysis

   In the context of security valuation, I remember I also saw there are two other kinds of prices

   • the book price/value

   • the current real price on the markets

   I wonder when deciding whether an asset is over/fair/under-valued, ususally what kind of price is compared to what other kind of price?

   Why is it in the quote to compare the first two kinds of prices, instead of comparing the current real price on the markets to any of the other three kinds?

Thanks and regards!

The Capital Asset Pricing Model (CAPM) for asset i is

E(R_i) = R_f + \beta_{i} (E(R_m) - R_f)

It can be used for asset pricing

We can compare the expected/required rate of return, E(R_i), calculated using CAPM, to the asset's estimated rate of return, based on either fundamental or technical analysis techniques (including P/E, M/B etc), over a specific investment horizon to determine whether it would be an appropriate investment.

Assuming that the CAPM is correct, an asset is correctly priced when its estimated price is the same as the present value of future cash flows of the asset, discounted at the rate suggested by CAPM. If the observed price is higher than the CAPM valuation, then the asset is undervalued (and overvalued when the estimated price is below the CAPM valuation)

Questions:

1. I was wondering how "future cash flows of the asset" are predicted? Are they also predicted using fundamental and/or technical analysis?

2. It seems like calculating expected/required rate using CAPM does not belong to either fundamental or technical analysis, does it? If indeed not belong, how are fundamental and technical analysis different from CAPM? I just would like to have some big picture.

3. In the quote, two kinds of prices have been mentioned:

   • the present value of future cash flows of the asset, discounted at some rate such as the rate suggested by CAPM, (called intrinsic price/value, if I am correct?)

   • the asset's estimated price as well as estimated rate of return, based on either fundamental or technical analysis

   In the context of security valuation, I remember I also saw there are two other kinds of prices

   • the book price/value

   • the current real price on the markets

   I wonder when deciding whether an asset is over/fair/under-valued, ususally what kind of price is compared to what other kind of price?

   Why is it in the quote to compare the first two kinds of prices, instead of comparing the current real price on the markets to any of the other three kinds?

Thanks and regards!

The Capital Asset Pricing Model (CAPM) for asset i is

E(R_i) = R_f + \beta_{i} (E(R_m) - R_f)

It can be used for asset pricing

We can compare the expected/required rate of return, E(R_i), calculated using CAPM, to the asset's estimated rate of return, based on either fundamental or technical analysis techniques (including P/E, M/B etc), over a specific investment horizon to determine whether it would be an appropriate investment.

Assuming that the CAPM is correct, an asset is correctly priced when its estimated price is the same as the present value of future cash flows of the asset, discounted at the rate suggested by CAPM. If the observed price is higher than the CAPM valuation, then the asset is undervalued (and overvalued when the estimated price is below the CAPM valuation)

Questions:

1. I was wondering how "future cash flows of the asset" are predicted? Are they also predicted using fundamental and/or technical analysis?

2. It seems like calculating expected/required rate using CAPM does not belong to either fundamental or technical analysis, does it? If indeed not belong, how are fundamental and technical analysis different from CAPM? I just would like to have some big picture.

3. In the quote, there are already two kinds of prices

   • the expected/required rate of return, E(R_i), calculated using CAPM,

   • the asset's estimated rate of return, based on either fundamental or technical analysis

   In the context of security valuation, I remember I also saw there are two other kinds of prices

   • the book price/value

   • the current real price on the markets

   I wonder when deciding whether an asset is over/fair/under-valued, ususally what kind of price is compared to what other kind of price?

   why is it in the quote to compare the first two kinds of prices, instead of comparing any of the other three kinds to the current real price on the markets?

Thanks and regards!

The Capital Asset Pricing Model (CAPM) for asset i is

E(R_i) = R_f + \beta_{i} (E(R_m) - R_f)

It can be used for asset pricing

We can compare the expected/required rate of return, E(R_i), calculated using CAPM, to the asset's estimated rate of return, based on either fundamental or technical analysis techniques (including P/E, M/B etc), over a specific investment horizon to determine whether it would be an appropriate investment.

Assuming that the CAPM is correct, an asset is correctly priced when its estimated price is the same as the present value of future cash flows of the asset, discounted at the rate suggested by CAPM. If the observed price is higher than the CAPM valuation, then the asset is undervalued (and overvalued when the estimated price is below the CAPM valuation)

Questions:

1. I was wondering how "future cash flows of the asset" are predicted? Are they also predicted using fundamental and/or technical analysis?

2. It seems like calculating expected/required rate using CAPM does not belong to either fundamental or technical analysis, does it? If indeed not belong, how are fundamental and technical analysis different from CAPM? I just would like to have some big picture.

3. In the quote, two kinds of prices have been mentioned:

   • the expected/required rate of return, E(R_i), calculated using CAPM,

   • the asset's estimated rate of return, based on either fundamental or technical analysis

   In the context of security valuation, I remember I also saw there are two other kinds of prices

   • the book price/value

   • the current real price on the markets

   I wonder when deciding whether an asset is over/fair/under-valued, ususally what kind of price is compared to what other kind of price?

   Why is it in the quote to compare the first two kinds of prices, instead of comparing the current real price on the markets to any of the other three kinds?

Thanks and regards!