Which of the following defines the investment decision?
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A. B. C. D. E.B
The investment decision, i.e., whether or not a particular stock is an attractive investment, is based on all three of these comparisons.
The correct answer is B. All of these answers.
The investment decision refers to the process of evaluating and selecting investments that will generate the highest return given a certain level of risk. It involves assessing various factors such as the expected value of the investment, the prevailing market price, the expected rate of return, and the required rate of return.
Let's go through each answer choice to understand how they define the investment decision:
A. Compute the expected value of the stock discounted to the present and compare it to the prevailing market price. If the present value of the expected price exceeds the market price, the particular stock is an attractive investment.
This answer emphasizes the concept of discounted cash flow (DCF) analysis. It suggests that to make an investment decision, one should estimate the future cash flows (expected value of the stock) and discount them back to the present using an appropriate discount rate. By comparing the present value of the expected price with the market price, one can determine if the stock is attractive or not. This approach focuses on the intrinsic value of the stock.
C. Compute an expected long-run rate of return based on the expected dividend yield plus the expected growth rate. If this expected return exceeds the required rate of return, the particular stock is an attractive investment.
This answer focuses on the expected long-run rate of return of the investment. It suggests that by considering the expected dividend yield (current dividend per share divided by the stock price) and the expected growth rate, one can estimate the future rate of return. If this expected return exceeds the required rate of return (the minimum return an investor expects to justify the risk), then the stock is considered attractive.
D. Compute the expected rate of return during the holding period on the basis of the expected value of the stock and the expected dividend. If this expected rate of return exceeds the required rate of return, the particular stock is an attractive investment.
This answer suggests calculating the expected rate of return during the holding period of the investment. It involves considering the expected value of the stock (similar to the first answer) and the expected dividend. By comparing the expected rate of return with the required rate of return, one can determine if the stock is attractive or not.
Considering all three answer choices, each provides a different perspective on the investment decision. Option A focuses on the intrinsic value of the stock, option C considers the long-run rate of return, and option D focuses on the expected rate of return during the holding period. Since all of these factors are important considerations when making investment decisions, the correct answer is B. All of these answers.