Question

Suppose that you are a trader at the stock market. T-Mobile’s stocks currently trade at $\$45$and 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?

Short answer

This future forecast is not ideal. This is because inflation expectations are influenced not only by previous expectations, but also by future monetary policy projections, as well as present and previous monetary policy.

Step-by-step solution

Optimal forecast : 

It is the forecast that indicates that individuals are making the best forecasts about the future based on all available facts.

:  Explanation : 

Assume you're a monthly inflation rate forecaster, and your previous six projections have been wrong by negative $1\%$. It signifies that in the previous six future projections, the actual and predicted inflation rates have differed by $1\%$, and hence this future forecast is not ideal.

This is because inflation expectations are influenced not only by previous expectations, but also by future monetary policy projections, as well as present and previous monetary policy. Furthermore, when new information becomes available, people's expectations alter rapidly. As a result, ideal expectations must be logical and adaptive, that is, they must take into account all available knowledge and be adaptable to changing circumstances.