Everything else held constant, if the expected return on bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to bonds and the demand for GE stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls

Question

Quizplus · Accepted Answer

If the expected return on bonds falls and the expected return on GE stock rises, GE stock becomes relatively more attractive than bonds, which makes the demand for GE stock rise. Therefore, the expected return of holding GE stock rises relative to bonds, and the demand for GE stock also rises.

Everything Else Held Constant, If the Expected Return on Bonds