In an Efficient Market, the Price of a Security Will

question 108

Multiple Choice

In an efficient market, the price of a security will:

• A) Always rise immediately upon the release of new information with no further price adjustments related to that information.
• B) React to new information over a two-day period after which time no further price adjustments related to that information will occur.
• C) Rise sharply when new information is first released and then decline to a new stable level by the following day.
• D) React immediately to new information with no further price adjustments related to that information.
• E) Be slow to react for the first few hours after new information is released allowing time for that information to be reviewed and analyzed.

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Definitions:

Systematic Risk

The risk inherent to the entire market or market segment, also known as market risk.

Levered Firms

Companies that use debt in their capital structure alongside equity.

Unlevered Firms

Companies that operate without the use of borrowed money or debt in their capital structures.

Interest Tax Shield

A reduction in taxable income that results from deducting interest payments, decreasing overall tax liability.