If 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 statement is known as the equilibrium pricing principle, which suggests that the market will adjust the price of a stock until its expected return is equal to the required return of the marginal investor. If the expected return exceeds the required return, investors will demand more of the stock, driving up the price until the expected return is reduced. Thus, the statement is true.

If a Stock's Expected Return as Seen by the Marginal