Investors' Required Return and the Cost of Equity

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CFAstudier

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Hello all,
“A decrease in share price will increase the expected return on the shares and an increase in share price will decrease expected returns” Could anyone explain this - doesn’t make sense intuitively? Is it just because on a return calculation (end price / beginning price - 1) will be higher if the beginning price is lower?
Thanks.
 
That’s the reason.
To intuitively understand, a fall in the share price means that not many people liked that share and thus it has gone down. Thus, the share is undervalued since it was valued less. Once it is undervalued it actually has fallen from a level above that price which it had reached earlier and now that it has fallen down, it has the scope to go up and if possible even reach/exceed the earlier high price from which it fell. So you expect a higher rate of return on the share!
Hope this helps!
 
A decrease in share price simply increases the riskiness of the shares, and thus investors will demand higher returns to compensate for that risk.
It is as simple as that.
 
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