Stock-Market Indicators of Efficiency

question 30

Essay

Stock-market Indicators of Efficiency. According to the Efficient Market Hypothesis, current stock prices reflect all relevant risk and return information. This implies that near-term stock price changes are random and independent. In a rational pricing environment, investing in the stock market is a "fair game" where the expected excess return for each security is zero. Taken literally, this means that every stock at every point in time is an equally good buy (or sell). Within this context, the stock market provides a useful context within which to evaluate managerial decisions. "Good" decisions boost share prices, and "bad" decisions cause share prices to fall.
A. Does evidence of inefficiency in the stock market reduce its usefulness as an indicator of managerial efficiency?
B. Suppose that the stock market is very efficient, but not perfectly efficient. Can stock prices still be used to provide information about managerial efficiency?

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Definitions:

Number Format

A setting that determines how numbers are displayed, such as decimal places, currency symbols, or percentages.

Format Cells Dialog Box

A feature in spreadsheet software allowing users to change cell appearance, including formats for numbers, text, borders, and colors.

Decimal Places

The number of digits to the right of the decimal point in a number, indicating its precision.

Fill Handle

A tool in spreadsheet software used to automatically fill in cells with data based on the pattern of existing data.