A person may be willing to pay more than the fundamental value of a stock today...
A person may be willing to pay more than the fundamental value of a stock today if he or she believes that someone else will pay even more for it in the near future.
When many people purchase stocks based on this reasoning, the stock market can develop:
Homework Answers
Moral hazard is a type of asymmetric information which occurs when a person gets involved in a risky event knowing that he/she is protected and someone else bears the costs of those risks.
Thus, one can make a case for moral hazard to be present in the stock market as the burden of the risk (high value of stockin near future) will fall to some other person in the near future.
But presently, the risk is borne by the person purchasing the stock higher than the stock's value. Thus, this is incorrect.
If a person believes that some other person will buy the sock in near future at a price higher than the fundamental value of stock, then he/she is indulging themselves in speculation. The person is speculating that someone will buy the stock in the near future.
Thus, stock market will develop a speculative bubble.
Information efficiency is when there is transparency of information about the price and the transaction costs in the stock market. Thus, this does not relate to the given scenario and hence this is incorrect.
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