ACCA Financial Management (F9) Certification Practice Exam

How do share prices typically behave according to market fluctuations?

1. They remain constant

2. They fluctuate around intrinsic value based on new information

3. They only rise over time

4. They are determined by regulatory interventions

The correct answer is: They fluctuate around intrinsic value based on new information

Share prices are influenced by various factors in the market, and they often reflect the intrinsic value of a company's stock based on new information that becomes available. This means that as investors receive new data about the company, the economy, or broader market conditions, share prices may rise or fall in response to this new information. The concept of intrinsic value pertains to the true worth of a company based on fundamentals, and when new insights—such as earnings reports, changes in management, or shifts in market sentiment—emerge, they can lead to adjustments in the share price as the market reacts. Market fluctuations, including investor sentiment and economic indicators, can lead to significant changes in share price as traders buy or sell based on their expectations of a company's future performance. This behavior aligns with the efficient market hypothesis, which suggests that share prices at any given time fully reflect all available information. Hence, the fluctuation around intrinsic value in response to new information is essential for understanding the dynamics of stock valuation in the marketplace.