Question

You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you thinka. the stock should be sold.b. the stock is a good buy.c. management is probably not trying to maximize the price per share.d. dividends are not likely to be declared.e. the stock is experiencing supernormal growth.

Answer 1

Answer: the stock is a good buy.

Explanation: The required return of a stock refers to the amount that will be paid to the security holders for bearing the risk of buying them. While the expected return refers to the return that the stock can earn from the market.

Thus, if the expected return is greater than the required return that it will eventually lead to retained earnings which will, further result in increase in the price of the stock.