All other things equal, a decrease in the equity risk premium leads to a(n):

Question

Quizplus · Accepted Answer

A decrease in the equity risk premium means that investors require less compensation for holding risky equities. This makes equities relatively more attractive than other investments, leading to an increase in demand for stocks and causing their price to rise. The required return on stock would decrease, not increase (choice A), as the risk premium is a component of the required return. The present value of stock (choice B) depends on the expected cash flows and the required return, which may or may not be affected by the change in the risk premium. The dividend growth (choice D) may be affected by various factors, but not necessarily by the change in the equity risk premium.

All Other Things Equal, a Decrease in the Equity Risk