Stock valuation models are used to determine a stocks justified price. Which of the following statements...
Stock valuation models are used to determine a stocks justified price. Which of the following statements is/ are correct?
I. A security is a suitable investment if the actual market price is equal to/less than the justified price.
II. An investment is worthwhile if the holding period return is equal to/ greater than the investors desired rate of return.
- I only
- II only
- Both I and II
- Neither I nor II
Homework Answers
Answer: Option C is correct.
Both the statements are correct regarding investments.
If market price of a stock is less than the justified price then it is considered as under valued and is a suitable investment option, If market price of a stock is equal to the justified price then it also gives good investment opportunity (particularly when the profits and revenues are expected to grow in future and add to the value of a company).
If the holding period return is equal to or greater than the required rate of return, then the investment is worthwhile.
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