Risk, Bubbles, Fads and Asset Prices Flashcards
1
Q
Why don’t all movements in stock and asset markets come from news about future dividends or interest rates?
A
- Variations in perceptions of risk
- Deviations of prices from their fundamental values - bubbles or fads
2
Q
Describe investors approaches to risk.
A
- Many are risk averse
- If people perceive stocks to be riskier than bonds and they are risk averse, they will demand a risk premium to hold stocks
3
Q
Describe fads.
A
When irrational investors pay a high price for stocks simply because they have done well in the past.
4
Q
Describe bubbles.
A
When stock prices exceed their fundamental values because investors expect stock prices to rise in the future.
5
Q
What is the fundamental value of a stock?
A
The expected pdv of future dividends
