Question

If the valuation of a stock is $25 and it currently sells for $20, then the stock is

a. Undervalued
b. Overvalued
c. The investor should establish a short (sell) position
d. The investor should establish a long (buy) position

Answer 1

If the valuation of a stock is $25 and it currently sells for $20, then the stock is undervalued. The investor should establish a long (buy) position.

Step-by-step explanation:

The stock is undervalued if its valuation is higher than its current selling price. In this case, the valuation of the stock is $25, while it is selling for $20. This means that the stock is undervalued.

This situation presents an opportunity for investors to establish a long (buy) position. By buying the undervalued stock, investors can potentially profit when its price eventually increases to reflect its true value.