Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Bubble

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A financial bubble happens only because of irrational behaviors of investors, such as herding activities or outright foolishness. Is this true or false?
  1. True
  2. False
Explanation
A financial bubble can also occur even when investors are most rational. The expectation is put forward to explain bubbles where stock prices are governed by others’ perception of other's perception of the stock price, rather than by the fundamentals. It is still rational behavior.

Key Takeaway: A financial bubble occurs when trades in products or assets happen in large volume at inflated prices. There are many causes of the bubble, but the most important one is speculation.
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