Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 17 Solutions
Emotions and Mispricing in the Market
1. Three conditions can lead to market values failing to reflect fundamentals. The three
conditions are (1) individuals behave irrationally, (2) a sufficient number of individuals
2. Mispricing would most likely occur in a market where emotions play a role in the pricing
and the markets have barriers or are illiquid. Of the list, the market for fine arts would be
3. The wider swings in price for a stock such as Google when compared to Exxon should
not be surprising. Google is a newer company in a more cutting-edge and uncertain
4. The conditions that could allow this to happen and persist are that a significantly larger
number of shareholders prefer to own the stock listed in one market over the other. It
might be the case that domestic buyers prefer to purchase only in their domestic markets,
5. It is more risky to take a short position in an overpriced stock because of the extra costs
and the possibility of even more irrationality (i.e., noise trading). The extra costs include
6. In 2001, the main industry that led the crash was the high-tech industry. Although the fall
in that sector had some effects on other areas of the market, it was not as severe or
7. The argument against regulating short selling is that the regulations could lower the
ability of short sellers to act on negative information and incorporate that information
13
8. An industrial company could buy and sell its own stock when it felt the general market,
and its own stock, were under- or overvalued. There are several problems with this
14
