It is well known that the stock market e¢ ciently incorporates information. Whic

Question

It is well known that the stock market e¢ ciently incorporates information. Which of the following statements is INCORRECT (does not make sense) assuming that the stock market is semi-strong form e¢ cient.

(a) "The reported earnings of Caterpillar was much higher than investors expectations. Therefore, the Caterpillar stock price increased sharply in response to the earnings news."

b) "It is expected that the oil price increase will boost provits of Exxon Mobil during the next quarter. Therefore, Exxon Mobilís stock price should appreciate during the next quarter."

(c) "Everyone expects the Federal Reserve to announce an increase of the interest rate tomorrow. Therefore, the announcement may not affect stock prices tomorrow."

(d) "When the stock prices incorporate information efficiently, stock prices behave like random walks, i.e., their price changes (or returns) are difficult to predict."

Explanation / Answer

B is incorrect. If oil price is expected to increase in the coming quarter, then the stock price would have already priced that in. There should be no change based on that information as it is already expected by the market participants.

A is correct. As the earnings were higher than expectation, the stock rallied.

C is correct because the annoucement is already priced in the stock prices.

D is correct because stock prices behave randomly based on the information flow and hence, difficult to predict.

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