Second pricing principal: supply equals demand -e-market in equilibrium Market equilibrium determines security prices in term of fundamentals Expectation of future cash flows Risk in the future cash flows tor's preference toward risk Example: CAPM price securities based on fundamentals price all securities key to understanding economic forces behind security pricesSecond pricing principal: supply equals demand ---market in equilibrium Market equilibrium determines security prices in term of “fundamentals” • Expectation of future cash flows; • Risk in the future cash flows; • Investor’s preference toward risk. Example: CAPM • price securities based on fundamentals; • price all securities; • key to understanding economic forces behind security prices