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Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 18 Solutions
Investors and Managers in Efficient Markets
1. Noise traders deserve attention from managers because their activity partly determines
2. The market for a stock is most efficient if there are both traders and fundamental
investors. If there were only fundamental investors, the stock would not be as liquid
3. On average, noise traders make returns close to zero because they will be right only about
4. Noise traders move in and out of shares quickly and cause short-term movements. Since
they both buy and sell a great deal, their volume of trading is high, but the long-term
5. The first company would see larger volatility, and there would probably not be enough
rational activity to bring the price in line with intrinsic value. The second company would
6. Since intrinsic investors tend to drive share prices in the long term, it is important for
managers to know how they think. Intrinsic investors are the ones who can look beneath
7. Yes, managers can attract certain investors. Managers can provide clear information to
address the concerns of intrinsic investors and try to react to their opinions. These actions
8. There will be volatility as new information arrives even if that information is the type that
intrinsic investors use. Although they trade less frequently, the trades of intrinsic
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