Suppose an Efficient Market Has Been Operating with Regard to Stock

question 13

Multiple Choice

Suppose an efficient market has been operating with regard to stock in a particular company and that company announces that its profits were up 50% from the previous period but the stock price was unchanged after getting the news on a day when all of the other stocks are barely moving. This is

• A)absolutely illogical.
• B)at least potentially consistent with the efficient market hypothesis because investors may have been anticipating a 75% gains.
• C)at least potentially consistent with the efficient market hypothesis because investors may have been anticipating a 25% gains.
• D)at least potentially consistent with the efficient market hypothesis because investors may have been anticipating those 50% gains.

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Definitions:

Pure Play

A company that focuses exclusively on a single product or service area.

Risk Characteristics

The inherent features of an investment that determine its potential return and the likelihood of loss.

Risk-Free Rate

The theoretical rate of return on an investment with zero risk, typically associated with government bonds.

Market Risk Premium

The extra return that investors require to hold a risky market portfolio instead of risk-free assets.