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, = r.
B) The past realized rate of return must be equal to the expected future rate of return; that is, = .
C) The required rate of return must equal the past realized rate of return; that is, r = .
D) All three 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

Markets are in equilibrium when the expected rate of return is equal to the required rate of return (r). This is because if the expected rate of return is higher than the required rate of return, investors will demand more of the asset, driving up its price and decreasing the expected rate of return. Conversely, if the expected rate of return is lower than the required rate of return, investors will supply more of the asset, driving down its price and increasing the expected rate of return. Therefore, only statement A is correct.

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