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

Question

Quizplus · Accepted Answer

In a market equilibrium, the expected return on each stock should equal its required return, as perceived by the marginal investor. This is because if a stock's expected return is higher than its required return, investors will rush to buy it, driving its price up and its expected return down. Conversely, if a stock's expected return is lower than its required return, investors will rush to sell it, driving its price down and its expected return up. Thus, in equilibrium, each stock's expected return should match its required return, ensuring that the market is efficiently pricing securities.

Markets Are in Equilibrium, Which of the Following Conditions Will