If the expected return is above the 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 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) sell the asset, since price is expected to decrease.

Question

Quizplus · Accepted Answer

Rational investors will buy the asset with the expectation of earning higher returns than required. This increased demand for the asset will drive the price up, leading to a decrease in expected returns, eventually bringing it down to the required return level.

If the Expected Return Is Above the Required Return on an Asset