Question

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

a. True
b. False

Answer 1

a. True

Step-by-step explanation:

The expected rate of return represents the profits an investor anticipates from an investment. Investors use different analytical tools to forecast price movements. An investor considers all the market risk factor before settling on a desired rate of return.

If the markets conditions are favorable, then the investor commits by purchasing the investment. He or she is expected to hold patiently until the investment gets to the desired price level. Investments are long-time ventures. It takes weeks, months or years before the investment reaches its target.

Once the target is price achieved, the investor cashes the investments and collects his or her profits.