Holding interest rates constant, a narrowing of the equity risk premium implies a decline in the return on stocks because the amount earned beyond the risk-free rate is reduced.

Question

Quizplus · Accepted Answer

A narrowing equity risk premium means the difference between the expected return on stocks and the risk-free rate decreases, indicating a lower return on stocks relative to the risk-free rate.

Holding Interest Rates Constant, a Narrowing of the Equity Risk