According to the efficient markets 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 markets hypothesis, stock price changes reflect changes in the underlying economic fundamentals, meaning that stock prices fully reflect all available information. However, according to Keynes, stock price changes often reflect irrational waves of optimism or pessimism, which can lead to stock prices deviating from their fundamental value. Therefore, the correct choice is C. Choices A, B, and D are incorrect because they do not accurately reflect the views of either the efficient markets hypothesis or Keynes.

According to the Efficient Markets Hypothesis, Stock Price Changes Reflect