in this chapter and elsewhere we have argued that a stock\'s market price can de
ID: 2693033 • Letter: I
Question
in this chapter and elsewhere we have argued that a stock's market price can deviate from its intrinsic value. Discuss the following question: If all investors attent to behave in an entirely rational manner, could these differences still exist? In answering this question, think about information that available to insiders versus outsiders, the fact that historical probabilities of financial events are fuzzier that probabilities related to physical items, and the validiity of the concepts of animal spirits, herding,and anchoring.Explanation / Answer
Intrinsic value of stock is actual value or real worth of the company’s stock where as market value of stock is prices that are prevailing in the market which is determined by demand and supply of the stock and price that investors are ready to pay. The answer for question if all investors attempt to behave in an entirely rational manner, could these differences still exists is Yes, the differences still exists. The reasons are that we as investors are outsiders who can only acts based on given information from the company. Most of the time company window dresses their information to make them superior than their competitors. In reality Company’s position might not be better as they are presenting. Investors invest into stock looking the information but because of the bad financial condition company may go bankruptcy or go down though their financial information looks fine. In addition to that company might plan to lunch new product, extend their geographical locations or acquire their largest competitors as a result their performance could go up. Only the insider people know about all those information unless they are published that makes stocks demand different. However efficient market hypothesis theory assumes that all investors are not rational and stock market price reflects intrinsic values. New information causes stock’s intrinsic value to move to new intrinsic value. Whenever intrinsic value of stock differ from market price investors take advantages of undervalued/overvalued stock and start buying/selling stocks which increase/decrease demand of stocks and make stock price equilibrium.
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