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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Business

Amina

28 August, 07:42

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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Dallas Buchanan · 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.

Tough Guy · 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.