Two conditions are used to determine whether or not a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal this investor's required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

Question

Quizplus · Accepted Answer

For a stock to be in equilibrium, both conditions must hold: the stock's market price must equal its intrinsic value as seen by the marginal investor, and the expected return on the stock as seen by the marginal investor must equal this investor's required return.

Two Conditions Are Used to Determine Whether or Not a Stock