Chapter 18, Problem 3PS

Summary Introduction

To determine: The relationship between the market capitalization rate and its expected rate of return if a security is underpriced.

Introduction:

The market capitalization can be defined as the value of the company which is traded on stock market and this can be calculated by the product of total number of shares and current price of share.

The expected rate of return can be defined as the amount of percentage return which is earned by the investor in certain period of time. The expected rate of return is the return on investment that an investor anticipates receiving.