Question

If an investor thinks that a stock's expected return exceeds its required return, the investor should _____.

Answer 1

If an investor thinks that a stock's expected return exceeds its required return, the investor should _____.

buy the stock.

Step-by-step explanation:

By purchasing the stock, the investor increases his returns. This is because the expected return is said to exceed the investor's required return. The expected return is the income that the stock will generate after weighing-in or considering other market variables. This expected return may be based on percentage terms or dollar dollars. It is better for the investor that the expected return exceeds the investor's required return.

Answer 2

Buy the stock because it is underpriced and investor will make money in the near future.

Step-by-step explanation:

Required rate of return is defined as the estimated return am investor wants to gain for taking on a certain amount of risk when investing in securities.

The higher the risk the higher the required rate of return.

If the expected rate of return exceeds the required rate of return then the investor will consider the share underpriced and experiencing supernormal growth.

For example if a stock has required rate of return as 10% and expected rate of return as 15%, it means that the stock will perform above its peer stock in the market and the price will rise in the future.