workshop 4 Flashcards
A stock price will increase if
Dividend growth rate increases
Expected risk is lower
A decrease in the required rate of return
increases the current stock price
Formula for gordon growth model
D1/ ke-g
What is the asset price (set by)
Buyer willing to pay the highest price
What effect does a monetary expansion have on stock prices
It increases stock prices
Why does an increase in the monetary expansion increase stock prices (lowering interest rates)
Due to a decrease in the required rate of return and an increase in the dividend growth rate.
What are adaptive expectations
The view that expectations change relatively slowly over time in response to new information.
Major criticism of adaptive expectations
View ignores that people use more information than just past data to form expectations.
What are rational expectations
“optimal forecast” is the best guess and unpredictable.
Reasons why an expectation might fail to be rational
- People may fail to use available information
- people may be unaware of some information.
According to rational expectations thoery, what would an individual do if a variable behaves differently?
Change the way they form expectations about the future.
What is the efficient market hypothesis
- Application of rational expectations to the pricing of securities.
- Prices of securities fully reflect all available information.
- The expected return on a security equals the equilibrium return.
What if the optimal forecast of the return on a security exceeds the equilibrium return.
The market is inefficient and an unexploited profit opportunity exists.
Efficient market hypothesis dictates that if an unexploited profit opportunity arises
it will be quickly eliminated in an efficient market.
January effect refers to
the fact that stock prices tend to fall
