Answered: According to the efficient market…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

According to the efficient market theory,

prices of actively traded stocks can be under- or over-valued in an efficient market, and bear searching out.

prices of actively traded stocks do not differ from their true values in an efficient market.

prices of actively traded stocks can only be under-valued in an efficient market

prices of actively traded stocks can only be over-valued in an efficient market.

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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