Question

30) When FED announces to increase interest rates? What should happen to stock market portfolio price? 1. Price should drop. 2. Price should Increase. 3. Price should drop by a magnitude closer to the drop seen in a 20-year zero-coupon bond than to that in a 1-year bond. 4. Price increase because expected return increases.

1, 3

2, 4

2

1

Answer 1

Solution:

When FED announces to increase interest rates? What should happen to stock market portfolio price?

1. Price should drop ("Correct") - Since, investors divert the fund to deposits instead of market portfolio

2. Price should Increase. ("Incorrect") - Since , Price should decrease and not icrease

3. Price should drop by a magnitude closer to the drop seen in a 20-year zero-coupon bond than to that in a 1-year bond ("Correct") - Since, Price drops to the magnitude closer historical price of ZCB , instead of latest bond.

4. Price increase because expected return increases ("Incorrect") - SInce price decreases.

Hence, 1 & 3 are correct options