How does perceived risk generally affect the market price of a share?

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Multiple Choice

How does perceived risk generally affect the market price of a share?

Explanation:
When a share is perceived as riskier, investors require a higher return to compensate for that risk. The price of a share is the present value of its expected cash flows (dividends and any eventual sale price), discounted at the rate that reflects risk. If perceived risk rises, the appropriate discount rate increases, which reduces the present value of those cash flows. So higher risk generally pushes the share price down, not up. It’s not limited to dividends alone—the risk affects the overall return investors demand from holding the stock, which is captured in the discount rate.

When a share is perceived as riskier, investors require a higher return to compensate for that risk. The price of a share is the present value of its expected cash flows (dividends and any eventual sale price), discounted at the rate that reflects risk. If perceived risk rises, the appropriate discount rate increases, which reduces the present value of those cash flows. So higher risk generally pushes the share price down, not up. It’s not limited to dividends alone—the risk affects the overall return investors demand from holding the stock, which is captured in the discount rate.

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