Final answer:
When the market risk premium rises, stock prices typically decrease because investors demand higher returns for taking on more risk.
Step-by-step explanation:
When the market risk premium rises, it typically implies that investors are demanding higher returns for the increased level of risk. This increase in the required return generally leads to a decrease in stock prices, as the future cash flows from the stock are discounted at a higher rate, reducing their present value. Therefore, when the market risk premium rises, stock prices are likely to decrease.
It is worth noting that this is a general trend based on established financial theory, specifically the Capital Asset Pricing Model (CAPM). However, actual market movements are subject to many variables and can often be unpredictable. Over the long term, the stock market experiences a mix of ups and downs, but with an overall upward trend that reflects economic growth and inflation.