If expected return is less than required return on an asset, rational investors will ________.
A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return
B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return
D) buy the asset, since price is expected to increase

Question

Quizplus · Accepted Answer

Rational investors will sell the asset, which will increase the supply of the asset and decrease its price. As the price decreases, the expected return on the asset will increase, eventually reaching the level of the required return.

If Expected Return Is Less Than Required Return on an Asset