An underpriced stock provides an expected return that is ________ the required return based on the capital asset pricing model (CAPM).

Question

Quizplus · Accepted Answer

An underpriced stock has a lower market price compared to its intrinsic value. According to the CAPM, the required return for an asset is calculated based on its beta (systematic risk), expected market return, and risk-free rate. If an underpriced stock provides an expected return that is greater than the required return based on CAPM, then investors can earn a higher return than what is justified by the stock's risk level. Therefore, an underpriced stock would provide a higher expected return than the required return, making choice C the correct answer.

An Underpriced Stock Provides an Expected Return That Is ________