12th Edition

ISBN: 9781264331062

Author: Ross

Publisher: MCG CUSTOM

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Textbook Question

Chapter 14, Problem 15CQ

Efficient Market Hypothesis Aerotech, an aerospace technology research firm, announced this morning that it has hired the world’s most knowledgeable and prolific space researchers. Before today, Aerotech’s stock had been selling for $100. Assume that no other information is received over the next week and the stock market as a whole does not move.

a. What do you expect will happen to Aerotech’s stock?
b. Consider the following scenarios:
1. i. The stock price jumps to $118 on the day of the announcement. In subsequent days it floats up to $123, then falls back to $116.
2. ii. The stock price jumps to $116 and remains at that level.
3. iii. The stock price gradually climbs to $116 over the next week.

Which scenario(s) indicate market efficiency? Which do not? Why?

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 14, Problem 14CQ

Chapter 14, Problem 16CQ

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Chapter 14 Solutions

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Solution Summary: The author explains that market efficiency is related to the relevant available information. Firm A's stock price will immediately rise after the announcement.

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