It has been argued that stock’s market price can deviate from its intrinsic valu
ID: 2758911 • Letter: I
Question
It has been argued that stock’s market price can deviate from its intrinsic value. Discuss the following question: If all investors attempt to behave in an entirely rational manner, could these differences still exist? In answering this question, think about information that’s available to insiders versus outsiders, the fact that historical probabilities of financial events are “fuzzier” than probabilities related to physical items, and the validity of the concepts of animal spirits, herding and anchoring.
It has been argued that stock's market price can deviate from its intrinsic value. Discuss the following question: If all investors attempt to behave in an entirely rational manner, could these differences still exist? In answering this question, think about information that's available to insiders versus outsiders, the fact that historical probabilities of financial events are "fuzzier" than probabilities related to physical items, and the validity of the concepts of animal spirits, herding and anchoring.Explanation / Answer
The market price of a stock is determined by the investor’s sentiments and demand and supply of the stock. If all investors start acting as rational human being and starts inventing rationally, there will not be any difference between market stock price and intrinsic value of the stock.
However, if the insiders have more information that outsiders and insiders’ are allowed to trade or share their information, then there can be deviation between stock price and intrinsic value.
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