Question #1
Reading: Reading 39 Economics and Investment Markets
PDF File: Reading 39 Economics and Investment Markets.pdf
Page: 1
Status: Unattempted
Correct Answer: A
Question
ABC Inc. stock's price is inversely related to the business cycle; it is higher during economic downturns. Which of the following appropriately characterizes the consumption hedging property of an investment in ABC stock and the equity risk premium demanded by investors for an investment in it?
Answer Choices:
A. Due to its desirable consumption hedging ability, an investment in ABC stock would command a higher equity risk premium
B. Due to its poor consumption hedging ability, an investment in ABC stock would command a higher equity risk premium
C. Due to its desirable consumption hedging ability, an investment in ABC stock would command a lower equity risk premium
Explanation
Assets that pay off during times of scarcity provide desirable consumption hedging
property. Investors will demand a lower equity risk premium on such assets.