Speculative bubbles may occur in the stock market

Question

a. during periods of extreme pessimism because so many stocks become undervalued.
b. only when people are irrational.
c. when stocks are fairly valued.
d. because rational people may buy an overvalued stock if they think they can sell it to someone for even more at a later date.

Answer 1

The correct answer is:

d. because rational people may buy an overvalued stock if they think they can sell it to someone for even more at a later date.

This captures the essence of speculative bubbles, where investors may ignore fundamental values and buy overvalued stocks based on the expectation that they can sell them to others at even higher prices. This behavior can contribute to the formation of bubbles in the market.