For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,
A) the past realized rate of return must be equal to the expected future rate of return; that is, .
B) the required rate of return must equal the past realized rate of return; that is, r = .
C) the expected rate of return must be equal to the required rate of return; that is, = r.
D) all 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

In order for markets to be in equilibrium, the expected rate of return must be equal to the required rate of return. This means that investors are willing to hold the asset at its current price, since they expect to receive the return that they require. If the expected rate of return is lower than the required rate of return, investors will sell the asset, which will cause the price to decrease, while if the expected rate of return is higher than the required rate of return, investors will buy the asset, which will cause the price to increase. Therefore, the only statement that correctly describes the condition for equilibrium is C.

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