Suppose Stock A and Stock B have the same risk. Suppose Stock A has a higher...

Suppose Stock A and Stock B have the same risk. Suppose Stock A has a higher expected return than Stock B. Which of the following is most accurate?

Investors would invest in Stock B since is has a lower return; this will push the price of Stock B down.

Investors would invest in Stock A since it has a higher return; this will push the price of Stock A down.

Investors would invest in Stock A since it has a higher return; this will push the price of Stock A up.

Investors would invest in stock B since it has a lower return; this will push the price of Stock B up.

Expert Solution

Option C is correct.

Investors would invest in Stock A since it has a higher return; this will push the price of Stock A up.

When both stocks have the same risk, then we should invest in the one that has a higher expected return. The stock with higher expected return will push its price up, not down. So, option B is incorrect

Options A and D are incorrect because we should not invest in stock B as it has a lower expected return and its stock price is expected to go down

jeff jeffy answered 2 years ago

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