If the risk premium associated with holding stocks increases at the same time that investors become more pessimistic and expect that long-term earnings will decrease, we would
A) initially expect the price of stocks to increase.
B) initially expect the price of bonds to decrease.
C) initially expect the price of stocks to decrease.
D) be unable to determine the impact on the price of stocks would unless we knew the relative magnitudes of the changes.

Question

Quizplus · Accepted Answer

An increase in the risk premium associated with holding stocks makes them less attractive to investors, leading to a decrease in demand and thus a decrease in stock prices. Additionally, if investors expect long-term earnings to decrease, this further diminishes the attractiveness of stocks, leading to a decrease in their prices.

If the Risk Premium Associated with Holding Stocks Increases at the Same