Holding everything else equal, if the expected return on My Company stock increases from 10% to...
Holding everything else equal, if the expected return on My Company stock increases from 10% to 15% and the expected return on That Company stock increases from 10% to 12%, the demand for My Company stock
A. decreases because owners are now wealthier.
B. increases because the expected return has increased relative to the alternative asset.
C. decreases because it is riskier.
D. increases because the expected return of That Company stock
increased
.
Homework Answers
Correct option is (B).
Expected return on My Company stock has increased by (15 - 10) = 5%, while expected return on That Company stock has increased by (12 - 10) = 2% which is less than 5%. Therefore demand for My Company stock will increase.
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