(9A). If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Question

Quizplus · Accepted Answer

This statement is a basic principle of the efficient market hypothesis, which states that stock prices immediately and accurately reflect all available information. If a stock's market price exceeds its intrinsic value, rational investors will sell the stock until its price matches its intrinsic value. This process of buying and selling should eventually lead to an equilibrium in which the stock's price reflects its true value.

(9A) If a Stock's Market Price Exceeds Its Intrinsic Value