Why Would Asset Prices Tend to Move Inversely with Interest

question 21

Multiple Choice

Why would asset prices tend to move inversely with interest rates?

• A)their present value decreases as interest rates increase.
• B)their present value increases as interest rates increase.
• C)their past value decreases as interest rates increase.
• D)prices tend to move the same as interest rates.
• E)none of the above.

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Definitions:

Risk Premium

The extra return above the risk-free rate that investors demand as compensation for the risk of an investment.

Systematic Risk

The risk inherent to the entire market or market segment, unavoidable through diversification.

Security Market Line

A line that represents the relationship between the risk of an investment and its expected return, based on the capital asset pricing model (CAPM).

Risk-Free Rate

The theoretical rate of return on an investment with no risk of financial loss, often represented by government bonds.