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Market interest rate

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The market interest rate, rd, for a given bond increased, then the price of the bond would decline. Applying this same logic to stocks, explain (a) how a decrease in risk aversion would affect stocks' prices and earned rates of return, (b) how this would affect risk premiums as measured by the historical difference between returns on stocks and returns on bonds, and (c) the implications of this for the use of historical risk premiums when applying the SML equation, and can you please support your positions.

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The market interest rate is essentially the opportunity cost of owning a bond. When it increases, some people will decide that the extra return on a bond is no longer worth the additional effort. The price of bonds will decline because demand for them has declined.

The market risk premium is the difference between the the required ...

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