Which One of the Following Best Describes the Current Understanding

question 15

Multiple Choice

Which one of the following best describes the current understanding of market efficiency?

• A)The market tends to overreact to new information in a manner that can be used to earn abnormal returns.
• B)Markets underreact to unanticipated events in a manner that can be used to earn abnormal returns.
• C)The market appears to be highly inefficient.
• D)Short-term market movements are difficult, if not impossible, to predict accurately.
• E)Markets tend to react slowly to unanticipated announcements.

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Definitions:

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, often used in calculating the weighted average cost of capital.

Cost of Debt

The effective rate that a company pays on its current debt, incorporating both interest payments and issuance costs.

All Equity Firm

A company that is financed solely through equity without the use of debt or leverage, relying entirely on shareholder funds.

Closely Held

A descriptor for corporations that have a small number of shareholders, with shares not publicly traded and often owned by family members or a small group of investors.