a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Question

Quizplus · Accepted Answer

This is the principle of equilibrium in finance, known as the Capital Asset Pricing Model (CAPM). If the expected return is higher than the required return, it implies that the stock is underpriced, and investors will buy it until the price is bid up and the expected return is reduced to match the required return.

A Stock's Expected Return as Seen by the Marginal Investor