Which of the following statements is CORRECT? a. The realized rate of return is

Question

Which of the following statements is CORRECT?

a. The realized rate of return is denoted simply as a lower-case r. It represents a statistical calculation of what will happen with the stock's future return. b. The required rate of return is denoted simply as a lower-case r with a straight line on top. This rate of return doesn't represent speculation about a stock's future return but represents the actual return you receive from the stock. c. The required return represents the return an investor requires to invest in the stock; the expected return is based on a statistical calculation of what will happen with the future value of the stock; and the realized rate of return is the actual, historic return earned on the stock. d. The actual values of the expected rate of return, the required rate of return, and the realized rate of return must be identical for financial markets to operate. e. None of the statements above are correct.

Explanation / Answer

Lets analyze each statement one-by-one.

a. The realized rate of return is denoted simply as a lower-case r. It represents a statistical calculation of what will happen with the stock's future return.

The realized rate of return doesn't represent a statistical calulation of the future return but it is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects.

Thus this is not true.

b. The required rate of return is denoted simply as a lower-case r with a straight line on top. This rate of return doesn't represent speculation about a stock's future return but represents the actual return you receive from the stock.

This is wrong as the rate of return is represent just by a lower case r.

c.  The required return represents the return an investor requires to invest in the stock; the expected return is based on a statistical calculation of what will happen with the future value of the stock; and the realized rate of return is the actual, historic return earned on the stock.

This is wrong. As The required return is not the return an investor requires to invest in the stock;

d. The actual values of the expected rate of return, the required rate of return, and the realized rate of return must be identical for financial markets to operate.

This is a true statement because if the expected return doesn't match to the required return no one will invest in the stocks, and if the realized return doesn't match the expected return then also no one will buy the stocks. So in the case of an ideal market, these three terms must be identical.

Thus the answer is (d).

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