Stock prices increase when expected future dividends ________, interest rates ________, and/or the risk premium ________.

Question

Quizplus · Accepted Answer

Higher future dividends increases the expected future value of a stock, which increases the stock price as it makes the stock more attractive compared to alternate assets. Similarly, when market interest rates fall, newly issued bonds become less attractive compared to stocks, so stock prices increase as savers choose to move funds to stocks from bonds. Finally, when a stock's riskiness falls, there is a smaller risk premium, which also causes a stock's price to rise.

Stock Prices Increase When Expected Future Dividends ________, Interest Rates