In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline Applying this same logic to stocks, explain (a) How a decrease in risk aversion would affect stocks prices and earned rates of return, (b) How this would affect risk premiums a...

a A decrease in risk aversion will decrease the return an ...

In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased,

Question:

In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline. Applying this same logic to explain
(a) How a decrease in risk aversion would affect prices and earned rates of return,
(b) How this would affect risk premiums as measured by the historical difference between returns on and returns on bonds, and
(c) What the implications of this would be for the use of historical risk premiums when applying the SML equation.

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...