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 expected rate of return must be equal to the required rate of return; that is,.
B) The past realized rate of return must be equal to the expected rate of return; that is,.
C) The required rate of return must equal the realized rate of return; that is,.
D) all companies must pay dividends.
E) no companies can be in danger of declaring bankruptcy.

Question

Quizplus · Accepted Answer

Equilibrium occurs when there is no pressure for prices to change, which means that expected rate of return (what investors believe they will earn) must be equal to the required rate of return (the minimum return investors demand for their investment). If the expected rate of return is higher than the required rate of return, demand for the asset will increase, driving up the price; conversely, if the expected rate of return is lower, demand will decrease, driving down the price. Therefore, for markets to be in equilibrium, the expected rate of return and the required rate of return must align.

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