Question

If the market price of a stock reflects all relevant information, what does its market price reflect?

	a.	the stock’s par value
	b.	the stock’s exogenous value
	c.	the stock’s intrinsic value
	d.	the stock’s extrinsic value

Answer 1

If the market price of a stock reflects all relevant information, this means that the investors cannot use any historical, present or future information to benefit or earn profits. All the information is already reflected through the stock prices.

This is the Efficient Market Hypothesis which states that the stock prices reflect its true market value and thus the investors cannot benefit from the undervalued or overvalued stocks.

Thus, the correct answer to this question is (C) i.e. the intrinsic value of the stock.

The intrinsic value is the true value of a stock. While the market price is the current price prevailing in the market. Under the Strong form of Efficient market hypothesis, the true value become the prevailing market price.

A stock's par value is the value of the stock at which it is officially recorded and is different from both market and intrinsic value.

The exogenous value is all the publicly related information. It is reflected under the semi strong form of Efficient Market theory.

While intrinsic value is a stock's own value, extrinsic value is a value beyond the intrinsic value and is not the true value of the stock.