If the expected rate of return for a particular investment, as seen by the marginal investor, exceeds its required rate of return, we should soon observe an increase in demand for the investment, and the price will likely increase until a price is established that equates the expected return with the required return.

Question

Quizplus · Accepted Answer

This statement is consistent with the basic principles of supply and demand in financial markets. When the expected rate of return for an investment exceeds its required rate of return, investors are likely to bid up the price of the investment in order to capture the higher returns. This process continues until the price reaches a level at which the expected return and required return are equal (i.e. the market reaches equilibrium).

If the Expected Rate of Return for a Particular Investment