Do you think the stock market is rational? Why or why not? Requirement: 150 words or...

Do you think the stock market is rational? Why or why not? Requirement: 150 words or more

Expert Solution

Yes, I believe the stock market is very rational. The stock prices are based on market sentiments which are based upon future expectations.These are based on past performance, current management and the future prospects of the business. Market analysts carefully analyse this data on the basis of which the expectations are formed. The investors are rational in their investing decisions. If they feel that the stocks have higher growth prospects in future and the business has a reason to flourish such as new technology,etc, they demand more of the stock. This pushes up the prices of the stocks. The market prices are also dependent upon the intrinsic value of the shares. This is based on the free cash flows/dividend patterns of the company. Higher the intrinsic value, higher is the market expectation and prices and vice versa. Hence I believe that the stock markets are quite rational in most times.

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