Market efficiency implications What does the efficient-market hypothesis have to say about these two statements? a. “I notice that short-term interest rates are about 1% below long-term rates. We should borrow short-term” b. “I notice that interest rates in Japan are lower than rates in the United States. We would do better to borrow Japanese yen rather than U.S. dollars.”

EBK PRINCIPLES OF CORPORATE FINANCE

12th Edition

ISBN: 9781259358487

Author: BREALEY

Publisher: MCGRAW HILL BOOK COMPANY

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in t…

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Chapter 13, Problem 13PS

Market efficiency implications What does the efficient-market hypothesis have to say about these two statements?

a. “I notice that short-term interest rates are about 1% below long-term rates. We should borrow short-term”
b. “I notice that interest rates in Japan are lower than rates in the United States. We would do better to borrow Japanese yen rather than U.S. dollars.”

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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Chapter 13, Problem 12PS

Chapter 13, Problem 14PS

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Solution Summary: The author analyzes the perception of the efficient market hypothesis regarding the given statements, stating that there is no simple way to make money.

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