Question 1 Relationship between interest rates and stock market prices
The following is a graph showing a relationship between stock prices and interest rates. No actual data is included in this graph; it is for illustrative purposes only.
The slope is negative indicating that there is an inverse relationship between stock prices and interest rates. Movement along the graph would result from changes in interest rates. The graph as presented assumes a direct linear relationship between stock prices and interest rates. If the relationship were, for example, exponential the curve would both move and change its shape, but the slope would remain negative as presented above. If the values on the X axes were reversed, from high to low rather than low to high the slope would be positive indicating that stock prices rise when interest rates fall.
The real question is one of supply and demand as influenced by interest rates (bond prices) and stock prices. . It is necessary to picture the supply and demand curves for stocks as they are influenced by bond returns/interest rates. It can be assumed that at any given time a finite quantity of investable funds exists for which the two competitive (stocks and bonds) investment mediums compete. As interest rates rise, the relative attractiveness of stock with their higher risk coefficient would fall, and the attractiveness of bonds would rise causing a proportionate reduction in the demand for stock. This would have the effect of reducing the demand for stocks and moving the demand curve for stocks to the left indicating that at a given price (Y axis value) the quantity of stocks demand (X axes value) would be lower, hence the price would fall
It can further be assumed that as stock prices rise, the quantity of shares available in the marketplace would increase and visa versa. This would have the effect of mitigating the price change, which would make the relationships non-line...