3. Briefly explain the effect of the risk-return trade-off on the market value of common stock.
-By increasing risk, discount rate decreases, so the present value decreases. Since the present value is lower, our stock price will be lower. The opposite it true as well...lower risk leads to lower discount rates, a higher net present value, and a higher stock price. We must be concerned with risk because higher profits don't always lead to higher stock prices, if the profits result from risky ventures.