Can someone explain point-4) through an example.It has been mentioned as notes in the ‘overview of equity securities’ chapter. I am not able to get a feel of it.
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Re in this chapter means what ideally one should expect return from the asset(like based on CAPM). In other chapters, it’s E(R).
Ke means what minimum return i want.
So, if Re<Ke, it means he will be very happy to buy the share as he is getting more than what he require.
You can apply the same logic for Re>Ke.
It was a grey area not clearly explained by the author…
He meant that every investor has different level of risk aversion and also assessment of risk…so Re will differ from one person to another.
However the price as prevailing in the market place is arrived and reflects consensus view of all investors and the return corresponding to it i.e., Ke is the minimum return firm must earn for shareholders