(9A). If markets are in equilibrium, which of the following conditions will exist?
A) Each stock's expected return should equal its realized return as seen by the marginal investor.
B) Each stock's expected return should equal its required return as seen by the marginal investor.
C) All stocks should have the same expected return as seen by the marginal investor.
D) The expected and required returns on stocks and bonds should be equal.
E) All stocks should have the same realized return during the coming year.

Question

Quizplus · Accepted Answer

In a market equilibrium, each stock's expected return should equal its required return as seen by the marginal investor. This means that the expected return on a stock is equal to the rate of return required by investors for holding that stock. When these two are equal, there is no incentive for investors to either buy or sell the stock, resulting in a stable market equilibrium. Option A is incorrect as realized return may differ from expected return due to unpredictable events. Option C and E are both incorrect as there may be differences in expected returns among stocks depending on their inherent risks and growth potential. Option D is incorrect as bonds may have a different risk profile and required return compared to stocks, and thus may not have equal expected and required returns in a market equilibrium.

(9A) If Markets Are in Equilibrium, Which of the Following