Question

A stock that promises a higher rate of return because the market has underestimated its growth potential is:

a. common stock
b. preferred stock
c. value stock
d. growth stock

Answer 1

A (d) growth stock promises a higher rate of return because the market has underestimated its growth potential.

Step-by-step explanation:

A stock that promises a higher rate of return because the market has underestimated its growth potential is a growth stock.

Growth stocks are issued by companies that are expected to experience above-average growth in their earnings and revenue. These stocks often trade at high price-to-earnings ratios because investors are willing to pay a premium for the potential for future growth.

For example, a technology company that is developing innovative products in a fast-growing market may be considered a growth stock. Investors believe that the company has the potential to generate high returns in the future, leading to an increase in its stock price.