1. What is Alpha Spread?

The Alpha Spread represents the percentage difference between a stock's intrinsic value and its current market price. A positive spread suggests potential undervaluation, while a negative spread may indicate overvaluation.

2. How Does the Calculator Work?

The calculator uses either DCF or Multiples model to determine intrinsic value:

Where:

• \( Intrinsic\ Value \) — Calculated via DCF or Multiples model
• \( Current\ Price \) — Market price of the security

Explanation: The spread measures the potential margin of safety or overvaluation relative to your calculated intrinsic value.

3. Importance of Intrinsic Value

Details: Intrinsic value represents the true worth of an asset based on fundamental analysis, helping investors make informed decisions regardless of market fluctuations.

4. Using the Calculator

Tips: Select your valuation model, enter the current market price and your calculated intrinsic value. The calculator will determine the percentage spread between these values.

5. Frequently Asked Questions (FAQ)

Q1: Which model is better - DCF or Multiples?
A: DCF is more comprehensive but requires more assumptions. Multiples are simpler but depend on comparable companies. Many analysts use both.

Q2: What's a good alpha spread?
A: This depends on your risk tolerance. Typically, a 20-30% positive spread provides a margin of safety, but this varies by industry.

Q3: How often should I recalculate intrinsic value?
A: Quarterly with earnings reports, or whenever there are material changes to the company's fundamentals or market conditions.

Q4: What are limitations of intrinsic value?
A: All models are based on assumptions that may not hold true. Market prices can remain irrational longer than you can remain solvent.

Q5: Should I only buy stocks with positive alpha spread?
A: While helpful, alpha spread should be one factor among many in your investment decision process.