UNIT VIII Q12

unit VIII Q12

unit VIII Q12

Q- Suppose that a stock has a price that gives it the same expected rate of return as a bank account. Explain why this is not an equilibrium situation.

Ans. We will have an equilibrium where the expected rate of return on the stock is higher than the interest rate on the safe bank account. The higher rate of return will be associated with the higher risk. Some stocks are more risky than others Thus a more risky stock will have a higher beta and will be discounted at a higher rate; less sensitive stocks will ...