I am having trouble understanding the interpretation of Tobin's q.
In the first paragraph of page 154 (SS7, Reading 19 of the CFAI curriculum), it says that Tobin's q is equal to 1 in equilibrium. If it is greater than 1 for an individual company, it means that the market is valuing their assets at more than their replacement costs, so future investment should be profitable (undervalued). By contrast, if less than 1, future investment should be unprofitable (overvalued).
In the second paragraph, it talks about Tobin's q at the market level, and seems to say the opposite: If greater than 1 then the market is overvalued, and if less than 1 then the market is undervalued.
Why would it be opposite for the overall market than it is for an individual company? It's the same equation, same ratio, except the numbers are aggregated. Help me understand this.
In the first paragraph of page 154 (SS7, Reading 19 of the CFAI curriculum), it says that Tobin's q is equal to 1 in equilibrium. If it is greater than 1 for an individual company, it means that the market is valuing their assets at more than their replacement costs, so future investment should be profitable (undervalued). By contrast, if less than 1, future investment should be unprofitable (overvalued).
In the second paragraph, it talks about Tobin's q at the market level, and seems to say the opposite: If greater than 1 then the market is overvalued, and if less than 1 then the market is undervalued.
Why would it be opposite for the overall market than it is for an individual company? It's the same equation, same ratio, except the numbers are aggregated. Help me understand this.