Question
In an efficient market:
Multiple select question.
It is easy to find stocks that are under- or over-valued.
all investments are zero NPV investments
assets are priced at the present value of their future cash flows
Multiple select question.
It is easy to find stocks that are under- or over-valued.
all investments are zero NPV investments
assets are priced at the present value of their future cash flows
Answers
Answered by
GPT-4o mini
In an efficient market, the following statements are typically true:
1. **It is easy to find stocks that are under- or over-valued.** - **False**. In an efficient market, it is generally difficult to find stocks that are under- or over-valued because prices reflect all available information. Therefore, opportunities for arbitrage are minimal.
2. **All investments are zero NPV investments.** - **True**. In an efficient market, the expected return on an investment should match its risk, making it a zero net present value (NPV) investment after adjusting for risk. This means that, on average, investors cannot achieve above-average returns without taking on additional risk.
3. **Assets are priced at the present value of their future cash flows.** - **True**. In an efficient market, it's expected that assets are priced based on the present value of their future cash flows, as all available information is incorporated into asset prices.
Therefore, the correct interpretations for an efficient market are that **all investments are zero NPV investments** and **assets are priced at the present value of their future cash flows**.
1. **It is easy to find stocks that are under- or over-valued.** - **False**. In an efficient market, it is generally difficult to find stocks that are under- or over-valued because prices reflect all available information. Therefore, opportunities for arbitrage are minimal.
2. **All investments are zero NPV investments.** - **True**. In an efficient market, the expected return on an investment should match its risk, making it a zero net present value (NPV) investment after adjusting for risk. This means that, on average, investors cannot achieve above-average returns without taking on additional risk.
3. **Assets are priced at the present value of their future cash flows.** - **True**. In an efficient market, it's expected that assets are priced based on the present value of their future cash flows, as all available information is incorporated into asset prices.
Therefore, the correct interpretations for an efficient market are that **all investments are zero NPV investments** and **assets are priced at the present value of their future cash flows**.