Question

Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock

Answer 1

Answer:

Overreaction and correction

Explanation:

Stock overreaction can be defined as the difference between the lowest price of stocks as a result of an event; e.g an election; and the price of the stocks after the event, after a period of time.

Stock correction on the other hand can be defined as a 10% or more decrease or decline in the value of an the financial market.

Each of stock overreaction and correction have causative events, as those events are the determinants of the change in the prices of stocks during the said time.

For stock price correction, it usually occurs as a result of economic issues. Stock correction can take from weeks  to months to happen and it can have a damaging effect on stocks on the short term but could actually be good for the stock prices if the correction occurs over a longer period of time.

Stock price overreaction, as seen from the definition, can be caused by an election or an event within the floor of teh stock exchange which excites stocks at that period.

Cheers.