Team Chapter Presentation
Please anwser Chapter 7 question:
7-10. Why Are Stock Prices So Volatile?
please create 1 google slide summarazing why stock prices are so volatile. Use the Chapter 7 file to guide you and create a 1 page paper to explain.
use this to help as well-
7-10Why Are Stock Prices So Volatile?
Recall from Chapter 6 that a typical company’s stock returns are very volatile. Because the average stock’s standard deviation is about 30%, it should not be surprising that many stocks declined by 80% or more during 2018, and some enjoyed gains of over 100%. At the risk of understatement, the stock market is volatile!
To help understand why stock prices are volatile, look at Figure 7-10. Even though the changes in the value drivers were relatively small, the changes in MicroDrive’s intrinsic stock price were very large, with the price ranging from $28.87 to $62.74. This shows that if investors change their expectations regarding future sales growth, operating profitability, capital utilization, or the cost of capital, then the stock price will change. As Figure 7-10 demonstrates, even small changes in the expected value drivers cause large changes in stock prices.
What might cause investors to change their expectations? It could be new information about the company, such as preliminary results for an R&D program, initial sales of a new product, or the discovery of harmful side effects from the use of an existing product. Or new information that will affect many companies could arrive, such as the collapse of the credit markets in 2008. Given the existence of computers and telecommunications networks, new information hits the market on an almost continuous basis, and it causes frequent and sometimes large changes in stock prices. In other words, readily available information causes stock prices to be volatile.
If a stock’s price is stable, this probably means that little new information is arriving. But if you think it’s risky to invest in a volatile stock, imagine how risky it would be to invest in a company that rarely releases new information about its sales or operations. It may be bad to see your stock’s price jump around, but it would be a lot worse to see a stable quoted price most of the time and then to see huge moves on the rare days when new information is released. Fortunately, in our economy timely information is readily available, and evidence suggests that stocks—especially those of large companies—adjust rapidly to new information.
