CAPM return question (over- vs undervalued)

CFA Level I Portfolio Management
#1

"Given the following data:

Expected return of stock Y 14%
Expected return of market index 11%
Risk-free rate 3%
Standard deviation of stock Y returns 15%
Standard deviation of market index returns 12%
Correlation of stock Y and market index returns 0.7

Based on the capital asset pricing model (CAPM), stock Y is most likely : undervalued"

Answer is undervalued, but I wanted to understand intuition.

I can arrive at the CAPM return which gives 10%, but I get a bit lost on the intuition of why 14% vs 10% means Y stock is undervalued.

Can someone help me clarify?

Thanks.

#2
r = \frac{\Delta P}{P}

If r is too big, then P is too small (assuming \Delta P is constant).

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