The theory of efficient markets suggests that the steep decline the value of stocks traded on the NASDAQ was due to
A) a speculative bubble.
B) a response to new information about firms' expected future profitability..
C) a natural cycle in technology stock prices evidenced by charts of previous prices trends.
D) moral hazard.

Question

Quizplus · Accepted Answer

The theory of efficient markets suggests that stock prices reflect all available information about a company, and that prices rapidly adjust to incorporate new information. Therefore, the steep decline in the value of NASDAQ stocks suggests that new information was learned about firms' expected future profitability, leading investors to adjust their valuations accordingly. This is consistent with the efficient market hypothesis. Choice A (a speculative bubble) suggests that stock prices were higher than their true fundamental value, which is inconsistent with the efficient market hypothesis. Choice C (a natural cycle in technology stock prices) does not account for the specific timing or magnitude of the decline, and is therefore not a strong explanation. Choice D (moral hazard) is unrelated to the steep decline in the value of NASDAQ stocks.

The Theory of Efficient Markets Suggests That the Steep Decline