Question

Which of the following describes an undervalued stock? a. The stock's expected return is greater than its required return. b. The stock's expected return is less than the risk-free rate. c. The stock's expected return and required return are the same. d. The stock's expected return is less than its required return.

Answer 1

The stock's expected return is less than the required return

Step-by-step explanation:

An undervalued stock is a stock whose selling price is significantly below the inherent value.

In order for a stock to be appropriately valued , the expected return should be greater than the minimum required return set by the investor. In a situation where the expected return is lower than than the minimum required return , such a stock is undervalued and the investor will end up making a loss on the investment.

Answer 2

d. The stock's expected return is less than its required return.

Explanation: An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock.