When relevant information regarding a stock's market price is provided, what is this price called______________?
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Answer: B. Intrinsic price
Explanation
Intrinsic price reflects the true economic value of a security based on all relevant fundamental information. It is derived independently of current market sentiments by analyzing cash flows, risks, and growth prospects. Investors calculate intrinsic value to determine if a stock is currently underpriced or overpriced. Benjamin Graham and other pioneer investors popularized the concept of intrinsic value in security analysis. Valuation models like dividend discount models are frequently employed to estimate this fundamental worth. Unlike market price, intrinsic value is an analytical estimate rather than a directly observable market quote.
Value investors search for stocks where the market price trades significantly below the calculated intrinsic price. When market prices deviate from intrinsic values, arbitrage opportunities can theoretically emerge for disciplined traders. It helps long-term investors ignore short-term market noise and focus on underlying business fundamentals. Market price is simply the current trading price visible on exchanges rather than the calculated fundamental value. Extrinsic price is a term more commonly used in options pricing rather than fundamental stock valuation. Unstable price describes price volatility rather than the fundamental worth or economic value of a security.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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