Market Portfolio Premium and Firm Share Price

B

If the premium on the market portfolio increases, the expected return on the stock goes up, too. All else equal, this can happen only if the price of the stock decreases.

When the premium on the market portfolio increases, the price of a firm's share is likely to decrease, all else equal.

The premium on the market portfolio refers to the excess return that investors demand for holding the market portfolio (typically represented by a broad-based stock market index such as the S&P 500). It reflects the additional compensation investors expect for taking on systematic risk compared to a risk-free investment.

When the premium on the market portfolio increases, it means that investors are demanding a higher return for investing in the overall market. This could be due to various factors such as increased uncertainty, deteriorating economic conditions, or a decrease in investor confidence.

As a result, investors become more cautious and reassess their valuations of individual stocks. They may be more inclined to sell their shares or demand a higher return from holding the shares of a specific firm. This increased selling pressure on the firm's shares leads to a decrease in their price.

Therefore, the correct answer is B. Decreases.