If a stock is correctly priced, then you know that ________.

Question

Quizplus · Accepted Answer

If a stock is correctly priced, then the sum of the stock's expected capital gain and dividend yield should be equal to the stock's required rate of return. This reflects the idea of the efficient market hypothesis, which assumes that all available information is already built into the stock price, and that investors cannot consistently earn above-average returns by simply buying undervalued or overvalued stocks. Option A is not necessarily true as the dividend payout ratio could be optimal at different price levels. Option B is incorrect because the required return on a stock is influenced by factors other than just the growth rate in earnings and dividends, such as overall market conditions, macroeconomic factors, and company-specific risks. Option D may be true in certain cases, but it is not a direct consequence of the stock being correctly priced.

If a Stock Is Correctly Priced, Then You Know That