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Stock return predictability is typically examined via the following predictive regression model:(1) ∊ r t + 1 = + x t + ∊ t + 1 , where r t + 1 is the return on a broad stock market index in excess of the risk-free interest rate (or equity premium or excess stock return) from the end of period to the end of period
The required rate of return is inversely proportional to the value of a stock. If the required rate of return is increased, then the value of the stock will decrease. So, a change in the required rate of return would impact the real value of the stock. The growth rate is directly proportional to the value of the stock.
Expected return is the amount of profit or loss an investor can anticipate from an investment. You can calculate expected return by multiplying potential outcomes by the odds that they occur and totaling the result. Expected return isnt a guarantee of the expected outcome.
An expected return is calculated by multiplying potential outcomes by the odds of them occurring and then totaling these results. Expected returns cannot be guaranteed. The expected return for a portfolio containing multiple investments is the weighted average of the expected return of each of the investments.
Answer and Explanation: The higher the required return, the lower the price. The price of an asset represents the cost of investment. By paying the price, investors get access to the future stream of cash flows the asset provides.
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If the required return rises, the stock price will fall, and vice versa. This makes sense: if nothing else changes, the price needs to be lower for the investor to have the required return. There is an inverse relationship between the required return and the stock price investors assign to a stock.
We show that option prices predict stock returns mostly because option prices are informative about the current and future conditions in the securities lending market. Put option prices, or the quotes of those options in absence of trading, internalize expected shorting costs.
First is the principle that risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same , the smaller the risk an investment poses, the smaller the potential return it will provide.

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