Question: 1. Apply the general asset pricing equation to the case of common stock, and derive a concise pricing equation under the assumption that dividends will grow at constant rate forever. [16.6%]
2. Explain the rational expectations hypothesis and discuss the evidence that suggests it is not a good description of real-life stock markets. [16.6%]
3. Discuss two psychological biases that may explain why the stock market may suffer from collective waves of overconfidence or excessive pessimism. [16.6%]