A stock bubble exists when the price of a stock is greater than the discounted value of its expected future dividends.

Question

Quizplus · Accepted Answer

A stock's price should be based on the present value of its future cash flows, including expected dividends. If the stock price exceeds the discounted value of its expected future dividends, it may be considered overvalued, which could lead to a bubble. In this scenario, investors may be buying the stock solely for the potential of capital gains and not considering the stock's fundamentals.

A Stock Bubble Exists When the Price of a Stock