The expected rate of return implied by a given market price equals the required rate of return for investors at the margin.

Question

Quizplus · Accepted Answer

This statement is true according to the theory of efficient markets, which assumes that market prices reflect all available information and that investors are rational and risk-averse. If the market price is lower than the required rate of return, investors will rush to buy the stock, driving up the price and lowering the expected rate of return. Conversely, if the market price is higher than the required rate of return, investors will sell the stock, driving down the price and raising the expected rate of return. At the margin, where the next investor can choose to buy or not buy the stock, the expected rate of return equals the required rate of return.

The Expected Rate of Return Implied by a Given Market