posted by Ed

If the market is efficient, what happens to the intrinsic value (proper price) and the price at which the market is pricing the stock out at?
My ANswer:
Won't pricing adjust immediately because the information moves so fast to the analysts?


  1. economyst

    There are a whole host of reasons why the daily market price of a stock will fluctuate around a stock's "proper" or "intrinsic" price.

    First, is the definition or determination of a stock's "proper" price. A stock's price is not based on the company's current performance or current earnings per share, but on the company's expected FUTURE performance. Since nobody (that i am aware of at least) has perfect foresight, expected performance is a weighted average of all relevant investor's expectations and assumptions about the future. And views about the future are different. Further, these collective expectations will change as new information is received. So, bottom line, the intrinsic value of a share of stock is an amorphous number.

    Which brings me to the market price or the price of a share of stock right now. Markets are efficient, but they are not perfectly efficient. Buying and selling of stock has transaction costs. In addition, just researching or monitoring a stock or a set of stocks has huge transaction costs. (Reading one prospectus or an analysts report is as dry as sand. Reading a 100+ would be a nightmare) So, many investors, knowingly enter the market with imperfect information.

    New information takes time to digest. Markets are constantly receiving information of all types from jillions of sources. Even the best analyst needs time to separate the wheat from the chaff, the relevant information from the spurious,

    Every day, the market has some people who are forced or required to sell; e.g., for personal reasons, they need to raise cash and will sell stock to do so. Similarly, the market has some people who are required to buy (e.g., a retirement fund manager who has just received new funds to invest in the market.)

    Risk and risk aversion is another reason why the market price may fluctuate away from the "intrinsic" price. Risk-neutral people tend to be Bulls, risk-adverse people tend to be Bears.

    With more time, I could think up even more reasons why markets prices fluctuate. But the key is that they fluctuate around your "intrinsic" price.

    I hope this helps.

  2. Ed

    Good to hear from you again! Thanks, as always for yor hwlp, you explained this alot better than the book did. Much appreciated!


Respond to this Question

First Name

Your Answer

Similar Questions

  1. marketing

    what are the pricing issues in the product category?
  2. managerial economics

    Discuss, in some detail, the following pricing concepts, especially their relevence for pricing decisions. a. Transfer pricing b. Joint product pricing c. Price leadership d. Bundle pricing
  3. managment science

    Supposed you have been hired as a Marketing Manager in a Multinational Company which is dealing in high tech products. Company wants to launch a cell phone in the market which can measure the Sugar level and Heart beat of the users. …
  4. Microeconomics

    Applying the concepts. 1.What is the break-even price?
  5. Economics

    The price received by sellers in a market will decrease if the government Answer A. imposes a binding price floor in that market. B. decreases a binding price ceiling in that market. C. decreases a tax on the good sold in that market. …
  6. Business

    The contrarian approach to investing is best illustrated by A. staying out of the market no matter what experts are saying. B. always buying when others are selling. C. investing in mutual funds, contradicting the idea that investing …
  7. Coporate Finance

    Two-State Option Pricing Model T-bills currently yield 5.5 percent. Stock in Nina manufacturing is currently selling for $70 per share. There is no possibility that the stock will be worth less than $65 per share in one year. a. What …
  8. Economics

    For each of the following products, write a few sentences answering the following questions: • Is price discrimination of any sort feasible?
  9. economy

    consider a perfectly competitive market in which all firms have the same costs. choose the statement that is incorrect a)the market demand is elastic at the market price b)each firm takes the market price as given and produces its …
  10. Econ

    In the case of a negative externality: Select one: a. the private market does not produce enough of the good. b. market price reflects the social costs of production. c. efficiency requires that the government impose a subsidy. d. …

More Similar Questions