If the Expected Rate of Return on a Stock Exceeds

question 67

Multiple Choice

If the expected rate of return on a stock exceeds the required rate, it means that _____

• A) the stock is experiencing a supernormal growth.
• B) the stock should be sold.
• C) the company is not trying to maximize the price per share.
• D) the stock is a good buy.
• E) the dividends are not declared.

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Definitions:

Asymmetric Information

A situation in which one party to a transaction has more or superior information compared to another.

Moral Hazard

The situation where one party is more likely to take risks because they do not bear the full consequences of those risks.

Hidden Action

A situation in contract theory and economics where one party's action is not observed or cannot be monitored by another, potentially leading to moral hazard.

Moral Hazard

The situation in which one party engages in risky behavior knowing that it is protected against the consequences, usually due to a contract or agreement.