Q: If the expected return on an asset is too HIGH given its beta investors will:
A: Buy the stock up to the point the expected return is again equal to that predicted by the SML.
Explanation: If the expected return on an asset is temporarily too high given its beta (Which means the market price is too low), investors will buy the stock until the price rises to the point where the expected return is again equal to that predicted by the SML.
I don't understand how " the expected return on an asset is temporarily too high given its beta (Which means the market price is too low)" Any help? |