Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock?
A) January effect
B) neglected-firm effect
C) P/E effect
D) reversal effect

Question

Quizplus · Accepted Answer

The neglected-firm effect suggests that a stock may be undervalued because it is overlooked or neglected by most investors. Since the stock does not trade on a major exchange, it is likely not well-known or followed by analysts, making it a potential target for excess returns based on fundamental analysis. The other choices (A, C, D) do not necessarily apply to this situation.

Fundamental Analysis Determines That the Price of a Firm's Stock