Question

Green Caterpillar Garden Supplies Inc.’s stock finished trading at a price of $42.01 for the day. The market price had varied from $41.93 to $42.10 throughout the day as buy and sell orders came in. It would be reasonable to consider the price of $42.01 per share as the firm’s_____________ for the day. (intrinsic value or equilibrium price)

Read the following statement, and use its information to determine which of the following statements is most accurate.

Nazim is a stock analyst who is looking to invest in small companies that will ideally become large, successful companies. The types of companies that he is considering have few analysts following them.

___Nazim can maximize his return by identifying the companies in this market segment that are potentially undervalued and investing in only them, because he is dealing with a relatively inefficient market.

____Nazim can maximize his return by diversifying his investment across all companies in this market segment, because the stock market is a highly efficient market. It would be a waste of time and money to try to pick individual companies that are currently undervalued.

Answer 1

Intrinsic value is the value of the stock based on internal factors. It represents true value of the company. Whereas the market price is based on the traded price of the security in the market. The market price changes as per the supply and demand of the stock in the secondary market. $42.1 is the market price.

If the market price is lower than the intrinsic value of the stock, there will be more demand of the stock in future and prices of stock will increase. The stock is called as undervalued stock. Therefore nazim can maximize his return by identifying the companies in this market segment that are potentially undervalued and investing in only them.

Also the companies he is looking for has fewer analysts following them and market is not efficient as of now. He may look for the opportunity in these companies