Efficient Market Hypothesis For each of the following scenarios, discuss whether

Question

Efficient Market Hypothesis

For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the market is weak form but not semistrong form efficient, (3) the market is semistrong form but not strong form efficient, and (4) the market is strong form efficient.

a. The stock price has risen steadily each day for the past 30 days.

b. The financial statements for a company were released three days ago, and you believe you’ve uncovered some anomalies in the company’s inventory and cost control reporting techniques that are causing the firm’s true liquidity strength to be understated.

c. You observe that the senior management of a company has been buying a lot of the company’s stock on the open market over the past week.

Explanation / Answer

a. The stock price has risen steadily each day for the past 30 days.

1. The market is not weak form efficient = no profit opportunities as the price has risen steadily

2) the market is weak form but not semistrong form efficient= Less Profit opportunities as market is not semistrong and week

3) the market is semistrong form but not strong form efficient, = profit opportunities exist with slow growth rate

4) the market is strong form efficient. = high profit opportunities exist fas market is very storng

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