Question

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:

a. Moral hazard
b. A speculative bubble
c. Informational efficiency

Answer 1

Answer:

The correct option is B, speculative bubble

Explanation:

Speculative bubble is a situation in investment market where the price of a stock reaches high heavens beyond what is considered to be a fair  price based on the potential dividends and capital gains yield of the stock.

Moral hazard involves not paying adequate to a risk situation because safeguard or mitigant such as insurance policy is in place and would adequately restore the business back to its previous position if a catastrophe strikes.

Informational deficiency is when investors do not have access to the same level of information due an artificial force withholding the information.

Answer 2

Answer: b. A speculative bubble

Explanation: A speculative bubble is also known as price bubble or market bubble and is defined as a sudden rise in the value of assets within an asset class or industry that is as a result of conjecture (exaggerated expectations of future growth, price appreciation, increase in asset values etc.), this leads to higher trading volumes as buyers surpass sellers. There is a complete disregard for fundamentals of that asset class until the bubble bursts and prices fall back down to normalized levels.