What occurs when a security is described as mispriced?

When a security is described as mispriced, it indicates that its market price deviates from its intrinsic value, which is determined by the fundamental cash flows the asset is expected to generate and the associated risk. Intrinsic value is calculated based on models that incorporate expected future cash flows, discount rates, and risk assessments. When the market price fails to align with this intrinsic value, it suggests that investors may be incorrectly valuing the security due to various factors such as market sentiment, inefficiencies, or lack of information.

This divergence creates opportunities for investors. If a security is underpriced (market price is less than intrinsic value), it can be seen as a buying opportunity, while an overpriced security (market price greater than intrinsic value) may prompt selling or shorting. This price misalignment is a fundamental concept in financial economics, as it can lead to arbitrage opportunities and informs both investment strategies and market behavior.

The other options do not accurately capture the essence of mispricing. A scenario where market price aligns perfectly with intrinsic value indicates correct pricing, not mispricing. The generation of a predictable income stream relates more to the characteristics of the security itself, rather than its pricing relative to intrinsic value. Lastly, reflecting only market speculation fails to consider the importance