Please help with Market reactions and efficient markets. Thanks:) The chart belo

Question

Please help with Market reactions and efficient markets.

Thanks:)

The chart below plots the stock price of MacLeod Industries during afternaon trading last Tuesday. Shartly after 2pm, MacLeod announced that it had won a new contract that is expected to bring in a lot of revenue to the firm. Previous to the announcement, the fundamental value of MacLeod's stock was $34 per share; afterward, it was $35.50 per share. This chart shows the actual behavior of the stock's price that day. STOCK PRICE (Dollars) 40 39 38 37 36 35 34 32 31 30 TIME (pml Which of the following best characterizes the market reaction to MacLeod's announcement? O Overreaction and correction O Efficient market reaction O Delayed reaction

Explanation / Answer

1. Option A

In the first graph we saw that prices increased first and then decreased, hence it is a case of overreaction and then it corrected

2. Option B

Competition among investors is likely to lead to matrkets being more efficient

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