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

a. True

Explanation:

Equilibrium refers to the level at which demand is equal to supply. In context of stock, it is attained when market price of a stock equals it's intrinsic value.

Intrinsic value is equals market value +/- sentiment of investors.

At the same time, another condition which is required to be complied with for equilibrium is, the expected return on stock should be equal to the investor's required rate of return.

Investor's required rate of return represents the average market rate of return other investors earn for a similarly priced stock. It is also called cost of equity.

Expected return on a stock refers to the probable or estimated return which the stock earns. Probability is used while calculating expected return.

At equilibrium level, the stock yields optimal return to the investors.

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