For a stock to be in equilibrium, that is, for there to be no long-term pressure

Question

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Question 6 options:

the expected future return must be less than the most recent past realized return.

the past realized return must be equal to the expected return during the same period.

the required return must equal the realized return in all periods.

the expected return must be equal to both the required future return and the past realized return.

the expected future return must be equal to the required return.

the expected future return must be less than the most recent past realized return.

the past realized return must be equal to the expected return during the same period.

the required return must equal the realized return in all periods.

the expected return must be equal to both the required future return and the past realized return.

the expected future return must be equal to the required return.

Explanation / Answer

For a stock to be in equilibrium,that is, for there to be no long-term pressure for its price to depart from its current level, then the expected future return must be equal to the required return.

As we know In equilibrium, stock prices are stable and there is no general tendency for people to buy or sell.

In stock equilibrium, two conditions must be fulfiled i.e ,

1. The stock market's price must equal its intrinsic value as seen by the marginal investor and

2.The expected return as seen by a marginal investor must equal this investor's required return.

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