If the expected rate of return on a stock exceeds the requir

If the expected rate of return on a stock exceeds the required rate, The stock is experiencing supernormal growth The stock should be sold. The stock price will increase until the expected return and the required return are the same. The expected return tends to exceeds the required return on a normal stock. Save

Solution

Expected rate of return means the return that stock is going to give in a particular period of time.

Whereas required return means that the return we expect from our investment.

So if a stock is giving more return then what we reuired,

The expected returns tends to exceeds the required return on a normal stock.

The other option can very much be true except 2nd one which is stock should be sold. We cannot sold the stock which will give highwr return in near future.