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Divergence of Opinion and Risk

Published online by Cambridge University Press:  06 April 2009

John Bart  and
Isidore J. Masse
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Extract

Edward Miller [5], expanding on the work of Williams [8], Smith [6], and Lintner [4], has proposed a direct relationship between a stock's “risk” and its “divergence of opinion.” Under conditions of uncertainty, potential investors in a stock arrive at different assessments of expected return. Thisvariation in expectations is characterized as the stock's divergence of opinion. Miller argues persuasively that at a point in time a stock's price does not reflect the expectations of all potential investors, but rather the expectations of only the most optimistic minority who are trading the issue. As long as this minority can absorb the entire supply of stock, an increase (decrease) in divergence of opinion-leaving the average expectation unchanged-will increase (decrease) the market clearing price.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 16 , Issue 1 , March 1981 , pp. 23 - 34
Copyright
Copyright © School of Business Administration, University of Washington 1981

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References

REFERENCES

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