Question

Name two of the general challenges covered regarding the accurate prediction of future stock prices and why they complicate the valuation process.

Answer 1

Few general challenges in the accurate prediction of future stock prices and how they complicate the valuation process:

1) Challenge with regards to acquiring important and relevant data and then process the same to analyse its effect on future stock prices. For example, algrithmic trading, long term predictions, sentiment analysis etc. These impact the valuation process as a lot of qualitative factors are taken into account during valuation and these can be misleading due to the above challenges.

2) In today's times, social media has been a great influencer and hence many forecasters base their valuations and predictions on online news or twitter etc. This is harmful as social media is not a reliable and authentic source of important information many times, a lot of fake news and rumours are posted which might impact the forecasts negatively. Thus the valuation gets affected owing to such misleading rumours.