You do a study and find out that, on average, stockprices for firms decrease 3%

Question

You do a study and find out that, on average, stockprices for firms decrease 3% for every 5% decrease in insideownership. You are watching the nightly business report and findout that Magic Tape’s stock has announced that insiders havesold 10% of their holdings. You are concerned because you own 1,000shares of Magic Tape and it had closed the day before unchanged at$30 per share. If markets are at least semi-strong form efficient,what would you expect?    A. You would expect Magic Tape to close at $28 the day of theannouncement. B. You would lose $4,000. C. You would lose $2.00 per share D. You would lose $1,800. You do a study and find out that, on average, stockprices for firms decrease 3% for every 5% decrease in insideownership. You are watching the nightly business report and findout that Magic Tape’s stock has announced that insiders havesold 10% of their holdings. You are concerned because you own 1,000shares of Magic Tape and it had closed the day before unchanged at$30 per share. If markets are at least semi-strong form efficient,what would you expect?    A. You would expect Magic Tape to close at $28 the day of theannouncement. B. You would lose $4,000. C. You would lose $2.00 per share D. You would lose $1,800. You do a study and find out that, on average, stockprices for firms decrease 3% for every 5% decrease in insideownership. You are watching the nightly business report and findout that Magic Tape’s stock has announced that insiders havesold 10% of their holdings. You are concerned because you own 1,000shares of Magic Tape and it had closed the day before unchanged at$30 per share. If markets are at least semi-strong form efficient,what would you expect?    A. You would expect Magic Tape to close at $28 the day of theannouncement. B. You would lose $4,000. C. You would lose $2.00 per share D. You would lose $1,800. You do a study and find out that, on average, stockprices for firms decrease 3% for every 5% decrease in insideownership. You are watching the nightly business report and findout that Magic Tape’s stock has announced that insiders havesold 10% of their holdings. You are concerned because you own 1,000shares of Magic Tape and it had closed the day before unchanged at$30 per share. If markets are at least semi-strong form efficient,what would you expect?    A. You would expect Magic Tape to close at $28 the day of theannouncement. B. You would lose $4,000. C. You would lose $2.00 per share D. You would lose $1,800. You do a study and find out that, on average, stockprices for firms decrease 3% for every 5% decrease in insideownership. You are watching the nightly business report and findout that Magic Tape’s stock has announced that insiders havesold 10% of their holdings. You are concerned because you own 1,000shares of Magic Tape and it had closed the day before unchanged at$30 per share. If markets are at least semi-strong form efficient,what would you expect?    A. You would expect Magic Tape to close at $28 the day of theannouncement. B. You would lose $4,000. C. You would lose $2.00 per share D. You would lose $1,800.

Explanation / Answer

If stock prices decrease 3% for every 5% decrease in insideownership, then they decrease 6% for a 10% decrease in insiderownership. That is simply 5% x 2 = 1=%, so 3% x 2 = 6%. So, You own 1,000 shares at $30/share, so you have 30*1,000 =$30,000 invested in Magic Tape's stock. So, the 10% decreasein insider ownership causes a 6% reduction in share prices, whichreduces each share by: 0.06*30 = $1.80. Now, since you have 1,000 shares, you lose $1.80*1,000 =$1,800. Hope this makes it clear and simple for you.

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