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

Question

Quizplus · Accepted Answer

If the expected return is less than the required return, rational investors will sell the asset, which will decrease the price of the asset. As the price decreases, the expected return will increase until it reaches the required return. Therefore, the best choice is to sell the asset, which is represented by choice C.

If Expected Return Is Less Than Required Return on an Asset