Question

a) despite the lockdowns and the number of deaths increasing and the fact that we still have not yet felt fully the effect of the crisis on the economy, why do you think that equity prices have recovered in the USA?

b) Do you think that the recovery in equity prices discussed in a) can be explained by finance theory, if yes which theory?

c) With reference to the theory explaining the pricing of equities, discuss four factors that could rationally explain why equity prices should decline?

Answer 1

A,) Yes, equity prices has substantially recovered because there has been 40% recovery from the lows of the bear market and market has almost called for the previous highs.

B) recovery in the equity prices can be attributed to market expectations theory and liquidity present in the stock market.

C) four factors that could explain why prices should decline would be-

1. Inflation as there is higher inflation the prices of equity tends to go down as purchasing power of money comes down.

2. when the interest rates goes up the market tends to come down as good are costlier

3. Tightening of Federal Reserve policy can also cause stirr in the market.

4. Inversion of yield curve is also taken as a bad sign for market.