Which of the Following Is TRUE of Efficient-Market Hypothesis

question 74

Multiple Choice

Which of the following is TRUE of efficient-market hypothesis?

• A)Securities are typically in disequilibrium,meaning they are fairly priced and their expected returns are more than their required returns.
• B)Insider trading scandals have proven that stocks are not fully and fairly priced; as a result,it would be worthwhile for investors should spend time searching for mispriced (over- or undervalued)stocks.
• C)At any point in time,security prices fully reflect all internal information available about the firm and its securities,and these prices are insensitive to new information.
• D)Since stocks are fully and fairly priced,it follows that investors should not waste their time trying to find and capitalize on miss-priced (undervalued or overvalued)securities.

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Definitions:

Residual Income

The amount of income that an individual or company has after all personal debts and expenses, including the cost of capital, have been paid.

Return On Investment

A measure used to evaluate the efficiency of an investment, calculated by dividing the benefit (or return) of an investment by its cost.

Investment Opportunity

An asset or item that presents a potential for profitable returns, as in interest, income, or appreciation in value.

Margin

The difference between the selling price of a product and its cost of production, often expressed as a percentage of sales.