According to the efficient-market hypothesis, stock price changes reflect , but according to Keynes, stock price changes often reflect .
A)the inventory accelerator; changes in Tobin's q
B)changes in the real cost of capital; financing constraints
C)changes in the underlying economic fundamentals; irrational waves of optimism or pessimism
D)reductions in investment tax credits; the use of historical cost rather than replacement cost in computing depreciation costs

Question

Quizplus · Accepted Answer

According to the efficient-market hypothesis, stock prices reflect changes in underlying economic fundamentals, meaning that prices adjust rapidly and accurately to new information. However, Keynes believed that stock prices often reflect irrational waves of optimism or pessimism, which can cause prices to deviate from their true underlying values. Thus, choice C is the best answer. Choices A, B, and D are incorrect because they do not accurately reflect the views of either the efficient-market hypothesis or Keynes' theories of stock prices.

According to the Efficient-Market Hypothesis, Stock Price Changes Reflect