Question

n the book, “Dow 36,000”, the authors, Glassman and Hassett, claim that stocks in 1999 were significantly undervalued and the Dow-Jones index should be 36,000, not 11,000. (10 points)

(i) What is the main reason behind their claim?

(ii) Is the reason valid? Explain.

Answer 1

(I)main reason behind the claim was-

They argued that if stocks and bonds were treated as equally risky, the Dow Jones index would be around 36,000. Hence, anyone who gets in now and stays for the long haul, can expect returns of around 300 per cent (in addition to the normal interest rate) as the rest of the market wakes up. Once this historic correction is over, the efficient-market hypothesis will hold sway

(ii)

No it was not a valid reason

Glassman and Hassett believed that both investors and official commentators had mistakenly considered stocks to be a risky investment which should require a premium return, when compared to 'safe' investments such as government bonds.

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