If the risk premium associated with holding stocks increases at the same time that the real rate of interest increases, 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 unless we knew the relative magnitudes of the changes.

Question

Quizplus · Accepted Answer

The risk premium is the additional return required by investors to hold stocks over bonds. If the risk premium increases, investors will require a higher return to hold stocks, which will lead to a decrease in the price of stocks.

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