3b) In addition, the price of U.S. stocks
[ Select ]
rises
falls
remains unchanged
moves ambiguously
and their risk premium
[ Select ]
rises
falls
remains unchanged
moves ambiguously
.

Question

3b) In addition, the price of U.S. stocks 
[ Select ]
rises
falls
remains unchanged
moves ambiguously
 and their risk premium 
[ Select ]
rises
falls
remains unchanged
moves ambiguously
 .

BlackTom AI · Accepted Answer

The question presents two blank selections about U.S. stock prices and the corresponding risk premium. We will analyze each blank in turn and consider why the given choices are correct or incorrect.

First blank (about the price of U.S. stocks): options to fill include: rises, falls, remains unchanged, moves ambiguously.
- If the correct completion is 'falls': this implies that, in the scenario described, stock prices are decreasing. The reasoning for a fall could be tied to adverse news, higher discount rates, weaker earnings expectations, or a shift to risk-off sentiment causing investors to demand higher expected returns for holding equities, which typically pushes prices down.
- If the price were to 'rise': this would indicate positive news or optimism, with higher valuations and price appreciation. However, given the provided answer shows 'falls', this option would be inconsistent with the stated correct pair.
- If the price 'remains unchanged': that would suggest no net price movement over the period in question, implying a balance of forces or temporary stagnation. This would not align with a scenario where the risk premium is moving in a particular direction (see second blank) unless offsetting factors are at play.
- If the price 'moves ambiguously': this phrase is vague and would not provide a clear directional signal, making it less suitable for a deterministic statement about price movement in standard analyses.
In summary, selecting 'falls' for the first blank points to a downward price movement, often associated with higher required returns or worsening fundamentals.

Second blank (about the risk premium): options to fill include: rises, falls, remains unchanged, moves ambiguously.
- If the correct completion is 'rises': a rising risk premium means investors require a higher expected return to compensate for risk, typically when prices are falling or when uncertainty or perceived risk in the market increases. This aligns well with a scenario where stock prices are falling (as in the first blank) because risk aversion or uncertainty tends to push up the compensation investors demand.
- If the risk premium were to 'fall': this would indicate investors need less additional return for bearing risk, which is more likely in a calmer or more favorable environment. It would be inconsistent with a falling price scenario unless specific countervailing forces were present.
- If the risk premium 'remains unchanged': no change in perceived risk compensation would be implied, which would not explain a directional change in stock prices without additional context.
- If the risk premium 'moves ambiguously': again, ambiguity reduces explanatory power for a directional relationship and is not as informative as a clear rise when prices are falling.
Thus, pairing 'falls' for the price with 'rises' for the risk premium creates a coherent narrative: prices decline while investors demand higher risk compensation, consistent with heightened perceived risk and risk-off behavior.

Putting it together, the two selections provided—price falls and risk premium rises—fit a common financial intuition: adverse conditions or increased risk lead to lower stock prices and higher risk premia demanded by investors, respectively. The other directional options either conflict with this logic or are too ambiguous to yield a clear explanation of the observed relationship.

2025Fall-ECN3615-01 Practice Final Exam

3b) In addition, the price of U.S. stocks [ Select ] rises falls remains unchanged moves ambiguously and their risk premium [ Select ] rises falls remains unchanged moves ambiguously .

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