Question

What will happen to the price of a stock if its expected return is less than its required return in an efficient market?

• A. Prices and returns are not related in any way

• B. It will rise

• C. It will fall

• D. It will not change

Answer 1

What will happen to the price of a stock if its expected return is less than its required return in an efficient market?

Price will fall. Option C is correct

Expected return less than the required return implies that the stock is overpriced. Price will fall to a level at which the expected return is equal to the required return.

Options A and D are incorrect because Price is related to the expected rate of return and it will change

Option B is incorrect because the price will fall, not rise