Question

Suppose that Google announces that its profits for the third quarter of 2013 were $1.6 billion. As a result of this announcement the price of Google' s stock declines. The best explanation of this is

A) market participants expected Google’s profits to be less than $1.6 billion for the third quarter

B) market participants expected Google’s profits to be greater than $1.6 billion for the third quarter.

C) the stock market is not an efficient market.

D) market participants have adaptive expectations

Answer 1

The market participants expected google's profit to be greater than the announced profit results in a fall in the stock price of Google.  

Google announces that its profit for the third quarter of 2013 was $1.6 million but the market participants expected Google's profit to be greater than $1.6 million for the third period, this causes a fall in stock price of Google.

Note: Price of stock either rise, fall or remain unchanged is depends on the expectation of market participants.

If participants expectation is higher than the actual profit then the price of a stock fall.

If participants expectation is lower than the actual profit then the price of stock increase.

if both are equal then price remains unchanged.

So, the correct answer is an option (B).