The study of asset valuation tel us that the stock price of any company
should reflect its expected future profitability. Although most of the tools of finance are well established, there is more controversy about the validity of the efficient markets hypothesis and whether stock prices are, in practice, rational estimates of a company’s true worth. Rational or not, the large movements m stock prices that we observe have important macroeconomic implications. Stock market fluctuations often go hand in hand with fluctuations in the economy more broadly. We will revisit the stock market when we study economic fluctuations later in the book.