Question

According to rational expectations, stock prices are actually... a. the discounted value of all future cash flows associated with the stock b. an estimation of what other individuals' perceptions are of the stock c. the underlying company's profits less liabilities on a per share basis d. impossible to estimate

Answer 1

a. the discounted value of all future cash flows associated with the stock.

Step-by-step explanation:

Stock prices can be seen as an estimated future value of the security. When investors buy shares they look at the performance of the business and buy shares based on this future analysis.

Also the issuer values the shares based on their future forecast of financial performance. For example when a share is issued for $1,000,000 the business would have estimated performance will justify the share price in the future.