An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?
A) The 20% stock is a better investment.
B) The 14% stock is overpriced.
C) Both stocks will have approximately the same return.
D) Both stocks are priced correctly given their perceived risk.

Question

Quizplus · Accepted Answer

The expected return of a stock is typically related to its risk. A higher expected return often indicates higher risk. Both stocks could be priced correctly if the 20% return stock carries more risk than the 14% return stock.

An Investor Is Faced with the Decision of Whether to Invest