The value of a stock should decline if
A) the risk‑free rate declines
B) the return on the market declines
C) the firm's beta rises
D) the earnings multiple rises

Question

​The value of a stock should decline if
A) ​the risk‑free rate declines
B) ​the return on the market declines
C) ​the firm's beta rises
D) ​the earnings multiple rises

Quizplus · Accepted Answer

The value of a stock is determined by its expected future cash flows, which are discounted at the appropriate rate of return. The appropriate rate of return is determined by the level of risk associated with the stock, which is often measured by the stock's beta. If the firm's beta rises, it indicates that the stock has become riskier, and the appropriate rate of return increases, which lowers the value of the stock. Therefore, the correct answer is C.

​The Value of a Stock Should Decline If

The Value of a Stock Should Decline If