The required rate of return on a stock:
A)is the risk-free rate plus a premium for the risk associated with the stock.
B)is the return expected based upon currently available information.
C)is the minimum return that generates trading.
D)is entirely determined by the return on an average stock.

Question

Quizplus · Accepted Answer

The required rate of return on a stock is the minimum rate of return that investors expect to earn from holding the stock. It is determined by adding a risk premium to the risk-free rate of return, which compensates for the risk associated with the stock. Therefore, choice A is the correct answer. The other options are incorrect. The return expected based on currently available information is the expected return, not the required rate of return. The minimum return that generates trading is the bid-ask spread, not the required rate of return. The return on an average stock does not determine the required rate of return on a specific stock.

The Required Rate of Return on a Stock