Question

What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

a) True
b) False

Answer 1

To correctly price two stocks relative to each other, the risk-free rate must be taken into account.

Step-by-step explanation:

The risk-free rate is the rate of return on an investment with no risk. In finance, it is often used as a benchmark to determine the expected return of an investment. To correctly price two stocks relative to each other, the risk-free rate must be taken into account. If one stock has a higher expected return than the risk-free rate, it would be considered underpriced relative to the other stock. Conversely, if one stock has a lower expected return than the risk-free rate, it would be considered overpriced relative to the other stock. Therefore, the risk-free rate plays a crucial role in pricing stocks.