Question

Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock?A. January effectB. Neglected-firm effectC. P/E effectD. Reversal effect

Answer 1

Answer:

The correct answer is letter "B": Neglected-firm effect.

Explanation:

The Neglected-firm effect has the purpose to explain why small companies that are not well-known have better performances than the ones that are. The theory explains that smaller companies' stocks generate higher returns because they are unlikely to be studied by market analysis. In that sense, because no much information is provided by the smaller firms -even lesser than what is required by law, they are neglected by analysts since there are very few data to take a look at.