6. Efficient market hypothesis Aa Aa B Suppose Winona owns a famous clam shack t

Question

6. Efficient market hypothesis Aa Aa B Suppose Winona owns a famous clam shack that enjoys an annual revenue of $275,000. If her business goes public, the stock price would be $5 per share, and there would be 100,000 shares dispersed throughout the marketplace. One day, Winona's neighbor Jamal pays her a surprise visit to discuss purchasing her clam shack. However, despite a shared background in economics, the two of them cannot agree on a sale price. Complete the dialogue below using your knowledge of the efficient market hypothesis and the Keynesian view of stock prices. Jamal: I am very pessimistic about the future prospects of your clam shack. I understand that your business brings in $275,000 in revenue each year, but I really don't think the business is worth more than $400,000. Winona: Well, if you believed in the efficient market hypothesis rather than the Keynesian view of stock speculation, you would agree that my clam shack is really worth Jamal: Sorry, I just don't think the value of a business is necessarily equal to its stock price. It looks like we can't make a deal. Winona: Luckily for me, not all economists agree on why stock prices fluctuate, so I'll just have to look elsewhere since I am not a believer of Keynes's view of stock speculation. which of the following statements would Winona agree with? Because the stock market is informationally efficient, unpredicted positive news about her company will increase the value of Winona's business. Winona can increase the value of her business by making Jamal believe it's worth more money. O The value of Winona's business is simply a reflection of people's opinion of it.

Explanation / Answer

The value of the stock will be $5 x 100000 = $500,000 and this is the answer to the blank option. It turns out that she belives that no one can beat the market as a whole. Hence the correct option to choose is the first onel. All the information is available to people so if she brings some unexpected positive news, her share price may increase.

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