ECO 205 Lecture Notes - Lecture 7: Efficient-Market Hypothesis, Dividend Discount Model, Rational Expectations

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27 May 2020

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Chapter 7: the stock market, the theory of rational expectations, and the efficient market hypothesis. In this chapter, we examine the theory of rational expectations. When this theory is applied to financial markets, the outcome is the efficient market hypothesis, which has some general implications for how markets in other securities besides stocks operate. Identify and explain the implications of the efficient market hypothesis for financial markets. hold. Computing the price of common stock (1 of 3) = the dividend paid at the end of year 1 k e. = the required return on investment in equity. = the sale price of the stock at the end of the first period. The value of stock today is the present value of all future cash flows. P n is far in the future, it will not affect. The price of the stock is determined only by the present value of the future dividend stream.