Explain the term efficient in the context of stock markets and discuss the different levels of stock market efficiency that may exist.
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Efficiency in stock markets refers to the degree to which stock prices reflect all available information at any given time. An efficient market is one where prices adjust rapidly to new information, making it difficult for investors to consistently achieve returns Show more…
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the concept of market efficiency underpins almost all financial theory and decisions . when financial markets are efficient , the price of a security such as a share of a particular corporation's common stock should be the present value estimate of the firm's expected cash flows discounted by its appropriate rate of return(also called the intrinsic value of the stock)
Kenny M.
1.Which of the following statements are true about efficient capital markets? Explain your answers:a) It implies perfect forecasting abilityb) It implies that prices perfectly reflect all available informationc) It implies an irrational marketd) It implies that prices do not fluctuatee) It results from keen competition among investors 2.Suppose that I purchase Enron bonds after Enron filed for bankruptcy. What do you expect the NPV of my purchase will be, positive, negative, or zero? Explain your answer. 3.Define the three forms of market efficiency. 4.Does semi-strong form of market efficiency also imply weak form efficiency? Explain your answer. 5.Critically evaluate the following: 'Market momentum is defined as the 60day average of the stock prices. If a firm's current price crosses the average price from below, this is interpreted as evidence of market strength and provides a buy signal. . If a firm's current price crosses the average price from above, this is interpreted as evidence of market weakness and provides a sell signal.' 6.Critically evaluate the following statement: 'Stock market is nothing more than a big casino. For each winner, there is a loser, and society is no better off'. 7.Some people argue that the stock market crash of 1987 contradicts the market efficiency hypothesis. Provide an explanation that is consistent with market efficiency. 8.Suppose that a group of 400 oil companies who have discovered oil exhibit the following systematic patterns: Stock prices rise abnormally by 5% one month before the announcement, stock price rise another 10% during the month of the announcement. After the announcement of the oil discovery, stock prices decline by 2% each of the next seven months. Is this consistent with semi-strong form of market efficiency? Explain your answer. 9.Suppose stock prices do not react at all to our company's five most recent announcements. Can this be taken evidence of market inefficiency? Explain. 10. Federal Reserve kept the interest rates the same but market rose by 1% on announcement of no change. This is definitely inefficient. Discuss.
Akash M.
According to the efficient market theory, A. prices of actively traded stocks can only be over-valued in an efficient market B. prices of actively traded stocks do not differ from their true values in an efficient market C. prices of actively traded stocks can be under- or over-valued in an efficient market, and bear searching out D. prices of actively traded stocks can only be under-valued in an efficient market
Jennifer S.
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