Price

Price: What we pay to buy/sell the asset in the market

(Market price)

Market price > intrinsic price: Stock is overvalued

Market price < intrinsic price: Stock is undervalued

Market price = intrinsic price: Stock is fairly price

Return

Amount of money we can make by our investment.

It is expressed under %

Risk

Likelihood of losing money

SENARIO 1

Artur Conan
  Pic Plc
Expected
Return 10% 10%
Risk 15% 15%
Price $100 $100

Law of one price: any two assets which are identical in all aspect then price is same

If it is not the case then arbitrage opportunity exists.

Artur Conan
  Pic Plc
Expected
Return 10% 10%
Risk 15% 15%
Price $100 $110

Then we can say Conan Plc is overvalued or Artur Plc is undervalued.

Rational investor would either ‘go long’ (buy) Artur Plc at $100 or ‘short’ (sell) Conan Plc at $110.

Or hedge their risk by doing both.

This influx of demand and supply change price.

SENARIO 2

Artur Doyle
  Pic Plc
Expected
Return 10% 10%
Risk 15% 20%
Price $100 ?

Because Doyle is risky hence its price is less.

Artur Doyle
  Pic Plc
Expected
Return 10% 10%
Risk 15% 20%
Price $100 <$100

SENARIO 3

Artur
  Pic Lock Plc
Expected
Return 10% 10%
Risk 15% 8%
Price $100 ?

Because Doyle is less risky hence its price is more.

Artur
  Pic Lock Plc
Expected
Return 10% 10%
Risk 15% 8%
Price $100 >$100

The value of an asset increases as the risk decreases and The value of an asset decreases as the risk
increases.

As risk increases expected return increases and As risk decreases expected return decreases.

increase decrease
Risk s s
decrease
Return s increases
Expected increase Decrease
Return s s