easy · Market Microstructure mmf-core
A value trader estimates a security's fundamental value to be $48.00. The security is trading at $44.00, and the trader's expected round-trip transaction cost is $0.30.
If the trader requires a margin of safety (risk premium) of $1.50 to account for estimation error, should the trader buy the stock?
- No, because the stock is only 8.3% undervalued
- No, because the required risk premium is too high relative to the stock price
- Yes, because any mispricing above the transaction cost of $0.30 is profitable
- Yes, because the mispricing of $4.00 exceeds the total threshold of $1.80
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