Appendix 9A: Stock Market Equilibrium True/False Page 349
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1
. If a stock’s expected return as seen by the marginal investor exceeds
this investor’s required return, then the investor will buy the stock
until its price has risen enough to bring the expected return down to
equal the required return.
a. True
b. False
2
. If a stock’s market price exceeds its intrinsic value as seen by the
marginal investor, then the investor will sell the stock until its
price has fallen down to the level of the investor’s estimate of the
intrinsic value.
a. True
b. False
3
. For a stock to be in equilibrium, two conditions are necessary: (1) The
stock’s market price must equal its intrinsic value as seen by the
marginal investor and (2) the expected return as seen by the marginal
investor must equal this investor’s required return.
a. True
b. False
4
. Two conditions are used to determine whether or not a stock is in
equilibrium: (1) Does the stock’s market price equal its intrinsic
value as seen by the marginal investor, and (2) does the expected
return on the stock as seen by the marginal investor equal this
investor’s required return? If either of these conditions, but not
necessarily both, holds, then the stock is said to be in equilibrium.
a. True
b. False
APPENDIX 9A
STOCK MARKET EQUILIBRIUM
Page 350 Conceptual M/C Appendix 9A: Stock Market Equilibrium
Multiple Choice: Conceptual
5
. If markets are in equilibrium, which of the following conditions will
exist?
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.
e. All stocks should have the same realized return during the coming
year.
6
. 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
a. the expected future return must be less than the most recent past
realized return.
b. the past realized return must be equal to the expected return during
the same period.
c. the required return must equal the realized return in all periods.
d. the expected return must be equal to both the required future return
and the past realized return.
e. the expected future return must be equal to the required return.
Appendix 9A: Stock Market Equilibrium Answers Page 351
APPENDIX 9A
ANSWERS AND SOLUTIONS