The Market Price of a Stock Moves or Fluctuates Daily

question 14

Multiple Choice

The market price of a stock moves or fluctuates daily. This fluctuation is:

• A) inconsistent with the semistrong efficient market hypothesis because prices should be stable.
• B) inconsistent with the weak form efficient market hypothesis because all past information should be priced in.
• C) consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it.
• D) consistent with the strong form because prices are controlled by insiders.
• E) None of these.

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Definitions:

Expected Returns

The projected return on an investment, taking into account both the probability and the impact of known risks.

Risky Securities

Financial instruments that carry a high degree of investment risk due to their significant exposure to market volatility.

Diversifiable Risk

The risk that a borrower will not pay theinterest and/or principal on a loan as it becomes due. Ifthe issuer defaults, investors receive less than the promised return on the bond. Default risk is influenced byboth the financial strength of the issuer and the terms ofthe bond contract, especially whether collateral has beenpledged to secure the bond. The greater the default risk,the higher the bond’s yield to maturity.

Required Rate

The minimum annual percentage return an investment must earn to be considered a viable option.