John Requires a 12% Rate of Return on EG Stock

question 16

Multiple Choice

John requires a 12% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?

• A) John will have to pay more for the stock than he was willing to pay.
• B) Investors with different required rates of return will pay different prices for the stock.
• C) John will not be able to buy the stock unless the price changes.
• D) John will buy the stock at a lower price.

---

Definitions:

Expected Rate

Often refers to the anticipated rate of return on an investment or the expected growth rate of an economic variable.

Risk-Averse Investor

An individual who prefers lower returns with known risks rather than higher returns with unknown risks.

Variances

Variances measure the dispersion of a set of data points around their mean value, identifying how spread out the data points are.

Risky Asset

An investment that has a significant degree of uncertainty regarding its future returns, potentially leading to losses as well as gains.