New Labs Just Announced That It Has Received a Patent

question 49

Multiple Choice

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses.This news is totally unexpected and viewed as a major medical advancement.Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

• A)The price of New Labs stock remains unchanged.
• B)The price of New Labs stock increases rapidly and then settles back to its pre-announcement level.
• C)The price of New Labs stock increases rapidly to a higher price and then remains at that price.
• D)All stocks quickly increase in value and then all but New Labs stock fall back to their original values.
• E)The value of all stocks suddenly increase and then level off at their higher values.

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Definitions:

Treasury Bills

Short-term government securities issued at a discount from their face value, with maturities typically less than a year.

Unsystematic Risk

The risk associated with a particular company or industry, also known as idiosyncratic risk or specific risk.

Retail Industry

The sector of the economy that sells consumer goods directly to customers.

Systematic Risk

The inherent risk associated with the entire market or market segment, which cannot be avoided through diversification.