What can be expected to happen when stocks having the same expected risk do not have the same expected return?
A) At least one of the stocks becomes temporarily mispriced.
B) This is a common occurrence indicating that one stock has more PVGO.
C) This cannot happen if the shares are traded in an auction market.
D) The expected risk levels will change until the expected returns are equal.

Question

Quizplus · Accepted Answer

If stocks with the same expected risk do not have the same expected return, then it indicates that at least one of the stocks may be mispriced. This creates an opportunity for investors to earn abnormal returns by buying the undervalued stock and selling the overvalued stock. Eventually, as more investors recognize the mispricing, the prices will adjust until the expected returns are equal.

What Can Be Expected to Happen When Stocks Having the Same