825 Words3 Pages

1) There are a few different explanations for deviation between a stock's market price and its intrinsic value. The first question relates to the degree of efficient market hypothesis to which one subscribes. Insiders have more information than outsiders do, so a purely rational decision made by an insider is going to be different than that made by an outsider. If one believes in the strong-form of the efficient market hypothesis, then the stock price would still not deviate from the intrinsic value on account of insider information. Fuzzy probabilities should still be reflected as rational behavior. This is because a fuzzy probably should be reflected as a weighted average of outcomes. If all investors work with the same information (strong form EMH) then the stock price would still reflect the intrinsic value based on the weighted average of probably outcomes. Herding and anchoring are both irrational behaviors, as is the animal spirit idea. Thus, if any of these are the root cause of deviation between market prices and intrinsic values, this is because they are irrational.
2) In the real world, it is not possible to construct a portfolio of stocks with an expected return equal to the risk-free rate. If CAPM is considered, the stock would need to have no market risk premium and no company-specific risk either. Such a portfolio would need to have a beta of zero. There are few companies with a negative beta, which would be required to construct such a portfolio. If such a

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