A reduced risk premium __________ the discount factor in the stock price valuation formula, and __________ stock prices.

Question

Quizplus · Accepted Answer

A reduced risk premium means that the required return on the stock is lower, which results in a higher present value of the future cash flows. This, in turn, raises the discount factor used in the stock price valuation formula. According to the formula, a higher discount factor results in a lower stock price, so the correct answer is that a reduced risk premium raises stock prices.

A Reduced Risk Premium __________ the Discount Factor in the Stock