markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,
A)The expected rate of return must be equal to the required rate of return; that is, = r.
B)The past realized rate of return must be equal to the expected future rate of return; that is, = .
C)The required rate of return must equal the past realized rate of return; that is, r = .
D)All three of the above statements must hold for equilibrium to exist; that is = r = .
E)None of the above statements is correct.

Question

Quizplus · Accepted Answer

The expected rate of return (E(R)) is the return investors anticipate receiving in the future, while the required rate of return (R) is the minimum return that investors demand in order to hold a stock. In order for markets to be in equilibrium, the expected rate of return (E(R)) must be equal to the required rate of return (R), as there would be no strong pressure for prices to rise or fall in this scenario. Option A is the only statement that reflects this requirement.

Markets to Be in Equilibrium, That Is, for There to Be