As inflation increases, the required rate of return on common stocks falls, as well as the prices.

Question

Quizplus · Accepted Answer

As inflation increases, the required rate of return on common stocks typically increases as well, as investors demand higher returns to compensate for the eroding purchasing power of their money. This often leads to a decrease in stock prices, as investors sell stocks or demand a higher dividend yield.

As Inflation Increases, the Required Rate of Return on Common