When to Make a Buy Decision: CTFA Exam Guide

B

The buy decision for an asset should be taken when the intrinsic value of the asset is greater than or equivalent to the current market price. Option C correctly describes the scenario where the buy decision should be taken.

Intrinsic value refers to the actual value of an asset based on its fundamental characteristics, such as earnings, cash flow, and assets. It is a measure of what an asset is worth, regardless of its current market price. On the other hand, the market price is the price at which the asset is currently trading in the market.

Option A suggests that the asset is overvalued, which means that the market price is higher than the intrinsic value. In this scenario, buying the asset would not be a prudent decision as it may lead to losses when the market corrects itself.

Option B suggests that the asset is undervalued, which means that the market price is lower than the intrinsic value. While buying undervalued assets may seem like a good idea, it is important to determine the reason for undervaluation before making a purchase decision.

Option D suggests that the current market price has doubled than the intrinsic value. Such a scenario may arise due to market inefficiencies or market manipulation. In such cases, it is advisable to stay away from such assets as they may be overpriced and may lead to losses.

Option C suggests that the intrinsic value is equivalent to the current market price. This is the ideal scenario for making a buy decision as the asset is trading at its fair value. In this scenario, the investor can expect to earn a reasonable return on investment over the long term.

In conclusion, the buy decision for an asset should be taken when the intrinsic value is greater than or equivalent to the current market price. Option C is the correct answer to this question. It is important for investors to analyze the intrinsic value of an asset before making a purchase decision to ensure long-term profitability.