Which of the following will lead to a decrease in the price of a stock, all else equal?
I. An increase in the systematic risk of the stock.
II. An increase in the total variance of the stock.
III. A decrease in its covariance with the market.
IV. An increase in the growth rate of its dividends.
Click on the arrows to vote for the correct answer
A. B. C. D. E.B
An increase in the stock's expected rate of return decreases the price of the stock. This will happen if the stock's systematic risk increases so I is a correct choice.
Note that the systematic risk decreases when the security's covariance with the market decreases. Hence, III is excluded.
An increase in the variance of the stock does not necessarily change its expected return. Only if the systematic component of the stock's variance changes will the expected return change, causing a price change. Therefore II is not a correct choice.
Finally, an increase in the growth rate of dividends will increase the stock price, so IV is also not a correct choice.