please explain this.
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Can U pls share the entire page. It is difficult to see that part & explain to U
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It is basically written that the required return for all investors is different
Required Return = R(E)
Minimum Return = Ke
Thus if at a particular point of time he is getting return higher than the Ke he will sell the share
But if he is getting lower that Re he will buy the share
Ke is cost of equity from Firm’s perspective.
On an average firm has to earn Ke to maintain their share price in the market.
And if your required return ie, Re is greater than Ke than you should not buy. because firm is expected to earn 13% and you want 15% , so this is overpriced according to your expectations.
but if you need only 10% then it is a good buy, because you only need 10% but the firm will give you 13%. hence its underpriced you you should buy it.
and when something is overpriced you can go short in that stock, that is written over there “Re>Ke, investor will sell the stock”.
you can go short in various ways, if you have the stock sell the stock, if you dont have it you can short sell the share or you can build short position using derivatives as well.