If the risk premium associated with holding stocks increases, we would initially expect
A) the price of stocks to increase.
B) the price of bonds to decrease.
C) the price of stocks to decrease.
D) the exchange rate to decrease.

Question

Quizplus · Accepted Answer

When the risk premium associated with holding stocks increases, it means investors require a higher return to compensate for the increased risk. This higher required return makes stocks less attractive at their current prices, leading to a decrease in stock prices as investors sell off their stocks or demand higher yields (which inversely affects stock prices).

If the Risk Premium Associated with Holding Stocks Increases, We