Market efficiency How would you respond to the following comments? a. “ Efficient market , my eye! I know lots of investors who do crazy things.” b. “Efficient market? Balderdash! I know at least a dozen people who have made a bundle in the stock market.” c. “The trouble with the efficient-market theory is that it ignores investors’ psychology.” d. “Despite all the limitations, the best guide to a company’s value is its written-down book value. It is much more stable than market value, which depends on temporary fashions.”

PRIN.OF CORP.FINANCE-CONNECT ACCESS

13th Edition

ISBN: 2810023360757

Author: BREALEY

Publisher: MCG

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing t…

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Chapter 13, Problem 5PS

Market efficiency How would you respond to the following comments?

a. “Efficient market, my eye! I know lots of investors who do crazy things.”
b. “Efficient market? Balderdash! I know at least a dozen people who have made a bundle in the stock market.”
c. “The trouble with the efficient-market theory is that it ignores investors’ psychology.”
d. “Despite all the limitations, the best guide to a company’s value is its written-down book value. It is much more stable than market value, which depends on temporary fashions.”

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 4PS

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Solution Summary: The author analyzes how an asset price in an efficient market is a marginal price or consensus price.

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