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

Question

Quizplus · Accepted Answer

Equilibrium occurs when the expected rate of return on an investment is equal to the required rate of return. This means that investors are willing to pay the current market price for an investment because they expect to earn the same return as the required rate of return. Choice A is incorrect because the past realized rate of return is not necessarily equal to the expected rate of return. Choice B is incorrect because the realized rate of return is historical and not necessarily related to the current required rate of return. Choice C and D are unrelated to the concept of market equilibrium.

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