Changes in stock prices occur because investors change the rates of return they require to invest in stocks and/or the expectations about the cash flows associated with stocks change.

Question

Quizplus · Accepted Answer

Changes in stock prices can occur due to various factors, but ultimately they are influenced by changes in investors' required rates of return and expectations about cash flows. For example, if investors become more optimistic about a company's future earnings potential, they may be willing to accept a lower rate of return to invest in its stock, which could drive up the stock price. Conversely, if investors become more risk-averse or if the company's expected cash flows decrease, they may demand a higher rate of return, which could drive down the stock price.

Changes in Stock Prices Occur Because Investors Change the Rates