The Stock Market Crash of October 1987 and the Great

question 42

Multiple Choice

The stock market crash of October 1987 and the Great Crash of 1929, although not fully explained, may be (partially) explained by:

• A) new information coming to the market; being efficient the market was priced down.
• B) technical difficulties in order processing.
• C) the bubble theory that prices move wildly above equilibrium values and eventually fall back to equilibrium causing large losses.
• D) the conspiracy theory that large institutions and rich investors control the market and caused the general population to suffer large wealth losses.

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Definitions:

Cost of Equity

The return that investors expect for providing capital to a company, often calculated using models like the Capital Asset Pricing Model (CAPM).

Economic Downturn

An economic downturn is a period of reduced economic activity characterized by decreased spending, investment, and employment.

Degree of Financial Leverage

A measure that assesses the impact of debt on a company's earnings, indicating how earnings are affected by the use of debt financing.

Net Income

The total profit of a company after all expenses and taxes have been deducted from revenue, indicating its financial performance over a period.