Reverse engineering share prices is an exercise in deductive reasoning. If we as

Question

Reverse engineering share prices is an exercise in deductive reasoning. If we assume market price reflects share value, then through reverse engineering we can infer what the market assumes about

a. the expected rate of return on equity capital, holding expected profitability and long-run growth constant.

b. the expected profitability, holding the expected rate of return on equity capital and long-run growth constant.

c. the expected long-run growth, holding the expected rate of return on equity capital and expected profitability constant.

d. All of these answer choices are correct

A very high degree of capital market efficiency

a. means share prices always correctly reflect all available information.

b. the capital markets anticipate and price correctly all possible future payoffs and states of the world.

c. means share prices react quickly, completely, and without bias once new value-relevant information is available to the market.

d. mispricing never occurs

Explanation / Answer

1. answer is d because  If we assume market price reflects share value, that means other variables are constant as provided in all the first three choices.

2. Market efficincy means that all the information relating to market are available to the market participants. hence answer is (a).

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