If the Expected Return Is Above the Required Return on an Asset

question 27

Multiple Choice

If the expected return is above the required return on an asset, rational investors will

• A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
• B) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
• C) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
• D) sell the asset, since price is expected to decrease.

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Definitions:

Bond Pricing

The determination of the fair price of a bond, taking into account the present value of its future coupon payments and return of principal at maturity.

Term Structure

A concept that describes the relationship between the yields of long-term and short-term bonds, typically indicating future interest rate movements.

Interest Rates

Interest rates signify the cost of borrowing money, typically expressed as a percentage of the principal amount loaned.

Inflation Premium

The portion of investment returns that compensates investors for the loss of purchasing power due to inflation.