Suppose that in year 2030, investors become much more willing than before to bear risk. As a

Question:

Suppose that in year 2030, investors become much more willing than before to bear risk. As a result, they require a return of 8% to invest in common stocks rather than the 10% that they had required in the past. This shift in risk aversion causes a 15% change in the value of the market portfolio.

a. Do stock prices rise by 15% or fall?

b. If you now use past returns to estimate the expected risk premium, will the inclusion of data for 2030 cause you to underestimate or overestimate the return that investors required in the past?

c. Will the inclusion of data for 2030 cause you to underestimate or overestimate the return that investors require in the future?

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...

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