Key Concepts
1. Explain stock valuation models.
2. Explain how to assess the risk of stocks and stock portfolios.
POINT/COUNTER-POINT:
Is The Stock Market Efficient?
POINT: Yes. Investors fully incorporate all available information when trading stocks. Thus, the
prices of stocks fully reflect all information.
COUNTER-POINT: No. The high degree of stock price volatility offers evidence of how much
disagreement there is among stock prices. The fact that many stocks declined by more than 40
percent during the end of 2008 and beginning of 2009 suggests that stock prices are not always
properly valued to reflect available information.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: There is no perfect answer, and there are valid arguments for and against whether markets are
efficient. However, an abrupt decline of stock prices does not refute market efficiency. If new information
about stock market conditions (such as a weakening economy) occurs, prices could possibly fully reflect
all information and yet adjust abruptly as the new information becomes available.