Which of the following describes an undervalued stock? a. The stock's expected return is greater than its required return. b. The stock's expected return is less than the risk-free rate. c. The stock's expected return and required return are the same. d. The stock's expected return is less than its required return.

Question

Harry Hanna

Business

12 February, 16:24

Which of the following describes an undervalued stock? a. The stock's expected return is greater than its required return. b. The stock's expected return is less than the risk-free rate. c. The stock's expected return and required return are the same. d. The stock's expected return is less than its required return.

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Answers (2)

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Malcolm Lam · Answer 1

The stock's expected return is less than the required return

Explanation:

An undervalued stock is a stock whose selling price is significantly below the inherent value.

In order for a stock to be appropriately valued, the expected return should be greater than the minimum required return set by the investor. In a situation where the expected return is lower than than the minimum required return, such a stock is undervalued and the investor will end up making a loss on the investment.

Snuggles · Answer 2

d. The stock's expected return is less than its required return.

Explanation: An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock.