Attempts 1 Keep the Highest: 1/3 8. Efficient markets hypothesis almost all fina
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Attempts 1 Keep the Highest: 1/3 8. Efficient markets hypothesis almost all financial theory and decision mode's. When financial markets The concept of market efficiency underpins are efficient, the price of a security-such as a share of a particular corporation's common stock-should be the present value estimate of the firm's expected cash flows discounted by its appropriate rate of return (also cailed the intrinsic value of the stock. Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of Investors to "beat" the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices Consider the following statement, and identify the form of capital market efficiency under the efficient market hypothesis based on this statement: Current market prices reflect all relevant information, whether it is known publidy or privately. This statement is consistent with: O Semistrong-form efficiency O Strong-form efficiency O Weak-form efficiency Consider that there is a semistrong-form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst förecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00, what will happen when the company releases its next earnings report? O The stock price will not change, because the market already incorporated that information in the stock price when the announcement was made O The stock price will Increase and settle at a new equilibrium level. O There will be some volability in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price.Explanation / Answer
When financial markets are efficient, the price of a security - such as share of a particular corporation's common stock - should be equal to the present value estimate of the firm's expectd cash flows discounted by its appropriate rate of interest (also called intrinsic value of the stock).
Market efficiency refers to where stock prices gets adjusted daily based on the new available information.
Current market price reflects all relevant information, whether it is known publicly or privately - This statement is strong form efficiency.
When the company releases its next earnings report the stock price will increase and settle at a new equilibrium level. The above is based on efficient market theory.
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