Question

Rational investors:

1. tend to be either overly optimistic or overly pessimistic.
2. cause stocks with similar risks to have similar expected returns.
3. always tend to undervalue stocks.
4. must include all investors if the market is to be efficient.
5. are all arbitrage traders

Answer 1

Answer: 2. cause stocks with similar risks to have similar expected returns.

Step-by-step explanation:

Rational Investors are what most humans are termed as. They are believed to undertake actions that will neither harm them.nor leave them neutral. In other words, Rational Investors want to be rewarded in a way that Optimum benefit is reached in relation to risk.

Because of this, they will usually expect a certain level of return for a certain level of risk so as to reach that Optimum benefit.

If all/most Rational Investors view a stock now for instance, as risky, they will expect individually, a certain level of returns but since they are all Rational, that level will probably be the same across the board.