Which of the following is TRUE about the implicit assumption of the Dividend Discount Model (DDM)that "investors are rational"?
I.It assumes that at each period of time, investors react rationally and value the shares based on what they rationally expect to receive next year.
II.It rules out "speculative bubbles" or what is colloquially known as the "bigger fool theorem."

Question

Quizplus · Accepted Answer

The Dividend Discount Model (DDM) implicitly assumes rational investor behavior, meaning investors value shares based on rational future dividend expectations (I is correct). It also inherently rules out speculative bubbles, aligning with the assumption that prices reflect rational expectations of future dividends, not speculative or irrational factors (II is correct).

Which of the Following Is TRUE About the Implicit Assumption