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Chapter 7: Q.13 (page 210)

Can a person with rational expectations expect the price of a share of Google to rise by10%in the next month?

Short Answer

Expert verified

The only way a person may anticipate a price increase is if he has superior knowledge than the rest of the market.

Step by step solution

01

Efficient market theory : 

It asserts that stock prices reflect all available information about a given stock quickly and thoroughly.

02

Explanation : 

With a price increase of 10%expected in the following month, the optimal stock return estimate may not meet the equilibrium return for Google stock. It implies that we can locate an untapped profit potential in the market.

On the other hand, an efficient market will eliminate all of the market's untapped profit prospects.

As a result, the only way a person may anticipate a price increase is if he has superior knowledge than the rest of the market.

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Most popular questions from this chapter

Compute the price of a share of stock that pays a \(5per year dividend and that you expect to be able to sell in one year for \)40, assuming you require a 5%return.

Suppose that you are a trader at the stock market. T-Mobile’s stocks currently trade at $45and the expected return is 9%. You have information that leads you to believe that by the end of year the company’s returns will be around 40%. Are your expectations optimal? How will your behavior influence the stock price?

“An efficient market is one in which no one ever profits from having better information than the rest of the market participants.” Is this statement true, false, or uncertain? Explain your answer.

If you read in the Wall Street Journal that the “smart money” on Wall Street expects stock prices to fall, should you follow that lead and sell all your stocks?

What are the two main sources of cash flows for a stockholder? How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to the problem of estimating bond cash flows. Which security would you predict to be more volatile?
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