The stock market, The Theory of Rational Expectations and the Efficient Market Hypothesis
3 important questions on The stock market, The Theory of Rational Expectations and the Efficient Market Hypothesis
What two potential cash flows are there that you have to take into account when you invest?
- Dividend
- Sale of Stock
What is the total return (formula)
Dividend Yield + Capital Gain Rate (The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk.)
How does the market set stock prices?
• The price is set by the buyer willing to pay the highest price.
• The market price will be set by the buyer who can take best advantage of the asset.
• Superior information about an asset can increase its value by reducing its perceived risk.
• Information is important for individuals to value each asset.
• When new information is released about a firm, expectations and prices change.
• Market participants constantly receive information and revise their expectations, so stock prices change frequently.
• The market price will be set by the buyer who can take best advantage of the asset.
• Superior information about an asset can increase its value by reducing its perceived risk.
• Information is important for individuals to value each asset.
• When new information is released about a firm, expectations and prices change.
• Market participants constantly receive information and revise their expectations, so stock prices change frequently.
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