Market efficiency evidence * Which of the following observations appear to indicate market inefficiency? Explain whether the observation appears to contradict the weak, semistrong, or strong form of the efficient-market hypothesis. a) Tax-exempt municipal bonds offer lower pretax returns than taxable government bonds. b) Managers make superior returns on purchases of (heir company’s stock. c) There is a positive relationship between (he return on the market in one quarter and the change in aggregate profits in the next quarter. d) There is some evidence that stocks that have appreciated unusually in the recent past continue to do so in the future. e) The stock of an acquired firm tends to appreciate in the period before the merger announcement. f) Stocks of companies with unexpectedly high earnings appear to offer high returns for several months after the earnings announcement. g) Very risky stocks on average give higher returns than safe stocks.

PRIN.OF CORPORATE FINANCE

13th Edition

ISBN: 9781260013900

Author: BREALEY

Publisher: RENT 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 9PS

Market efficiency evidence* Which of the following observations appear to indicate market inefficiency? Explain whether the observation appears to contradict the weak, semistrong, or strong form of the efficient-market hypothesis.

a) Tax-exempt municipal bonds offer lower pretax returns than taxable government bonds.
b) Managers make superior returns on purchases of (heir company’s stock.
c) There is a positive relationship between (he return on the market in one quarter and the change in aggregate profits in the next quarter.
d) There is some evidence that stocks that have appreciated unusually in the recent past continue to do so in the future.
e) The stock of an acquired firm tends to appreciate in the period before the merger announcement.
f) Stocks of companies with unexpectedly high earnings appear to offer high returns for several months after the earnings announcement.
g) Very risky stocks on average give higher returns than safe stocks.

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 8PS

Chapter 13, Problem 10PS

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Solution Summary: The author explains the statements which indicate the market inefficiency and whether it contradicts strong, semi-strong, or weak form of efficient market hypothesis.

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