If a given investor believes that a stock’s expected return exceeds its required return, then the investor most likely believes that

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BlackTom AI · Accepted Answer

When evaluating the statement, we need to connect the idea of expected return versus required return to investment decisions.
Option 1: 'the stock is a good buy.' If an investor believes the expected return is higher than the required return, the stock is providing more return than what is needed given its risk. This creates a favorable expected payoff relative to the required compensation, which typically leads to a buying inclination.
Option 2: 'management is probably not trying to maximize the price per share.' The comparison of expected versus required return is about the stock’s value and return prospects, not a direct statement about management's objectives. This option introduces a separate managerial objective claim that isn’t logically implied by the expected > required return, so it’s misleading.
Option 3: 'the stock should be sold.' If the expected return exceeds the required return, that would generally argue for holding or buying more, not selling, since the investment is undervalued relative to the return required by risk. This makes the assertion opposite to the scenario described.
Option 4: 'dividends are not likely to be declared.' The expectation of a higher return versus required return speaks to pricing and return relative to risk, not to dividend policy specifically. It’s not a necessary implication and could be true or false independent of the comparison between expected and required return.
Option 5: 'the stock is experiencing supernormal growth.' While supernormal growth could influence expected returns, the condition given (expected return > required return) does not by itself imply supernormal growth. It merely indicates favorable valuation; assuming supernormal growth would be an additional detail not required by the premise.
In summary, the core idea is that when the expected return surpasses the required return, the stock is considered attractive or a good buy, while the other statements introduce claims about management objectives, selling, dividends, or growth that are not logically compelled by the given comparison.

Business Finance Chapter 09 Quiz

If a given investor believes that a stock’s expected return exceeds its required return, then the investor most likely believes that

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