A situation in which the price of an asset differs from its fundamental market v

Question

A situation in which the price of an asset differs from its fundamental market value

indicates that unexploited profit opportunities exist.

b indicates that unexploited profit opportunities do not exist.

c need not indicate that unexploited profit opportunities exist.

indicates that the efficient market hypothesis is fundamentally flawed.

indicates that unexploited profit opportunities exist.

b indicates that unexploited profit opportunities do not exist.

c need not indicate that unexploited profit opportunities exist.

indicates that the efficient market hypothesis is fundamentally flawed.

Explanation / Answer

A situation in which the price of an asset differs from its fundamental market value need not indicate that unexploited profit opportunities exist. Such situation is called a bubble. Investors have a rational expectations that a higher price for the asset in the future is possible. The bursting of the bubble cannot be predicted and hence it need not indicate that unexploited profit opportunities may exist.

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