Certified Financial Management Specialist Practice Exam

What are rapid price increases followed by sharp declines in assets known as?

1. Market Corrections

2. Asset Bubbles

3. Speculative Frenzy

4. Investor Flocks

The correct answer is: Asset Bubbles

Rapid price increases followed by sharp declines in assets are known as asset bubbles. This phenomenon occurs when the price of an asset, such as real estate or stocks, inflates significantly above its intrinsic value due to exuberant market behavior. The driving factor behind an asset bubble often includes investor speculation and irrational exuberance, leading to unsustainable price levels. Eventually, the bubble bursts when prices sharply decline, often triggered by changes in market sentiment or economic indicators that reveal the asset's true value. Understanding asset bubbles is crucial because they can result in significant financial loss for investors and can impact the broader economy. Recognizing the signs of a bubble, such as soaring prices that are not supported by fundamentals, can help investors make more informed decisions. The other terms mentioned relate to market dynamics but do not specifically describe the cycle of rapid price increases followed by sharp declines.