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, $\overline { \mathrm { r } } = \tilde { \mathrm { r } }$ .
B)The required rate of return must equal the realized rate of return; that is, r = $\overline { \mathbf { r } }$ .
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, $\hat { r }$ = r.

Question

Quizplus · Accepted Answer

Equilibrium occurs when the expected rate of return (the return that investors anticipate earning) is equal to the required rate of return (the return necessary to compensate for the level of risk associated with an investment). This means that there are no strong pressures for prices to rise or fall. Therefore, option E is the correct answer as it states that the expected rate of return must be equal to the required rate of return for markets to be in equilibrium. The other options (A, B, C, and D) are not necessary conditions for markets to be in equilibrium.

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