Asked by Jason Vowels on Jun 09, 2024
Verified
If markets are in equilibrium,which of the following will occur?
A) Each stock's expected return should equal its realized return as seen by the marginal investor.
B) Each stock's expected return should equal its required return as seen by the marginal investor.
C) All stocks should have the same expected return as seen by the marginal investor.
D) The expected and required returns on stocks and bonds should be equal.
Expected Return
Expected return is the anticipated average return of an investment over a specified period, taking into account both expected gains and potential losses.
Required Return
The Required Return is the minimum expected return an investor anticipates on an investment to make it worthwhile, encompassing the risk-level associated with the investment.
Marginal Investor
An investor whose actions and choices at the margin are believed to determine the price of a stock.
- Identify the basis of market equilibrium and its significance for investment choices.
Verified Answer
EH
Emily HurleyJun 16, 2024
Final Answer :
B
Explanation :
In market equilibrium, each stock's expected return should equal its required return as seen by the marginal investor. This is because in equilibrium, the supply and demand for stocks are balanced and prices are such that investors are getting a fair return on their investment. The expected return is the return that an investor expects to earn on a stock based on its past performance and other factors, whereas the required return is the return that compensates investors for the level of risk associated with an investment. In equilibrium, these two returns should be equal, ensuring that investors are getting a fair return on their investment.
Learning Objectives
- Identify the basis of market equilibrium and its significance for investment choices.