Reading 48: Forms of Market Efficiency
Which of the following statements is least accurate? Estimates of intrinsic values and market prices keep changing. Intrinsic value is determined by the interaction of demand and supply for the security in the market. Market prices reflect a security's intrinsic value in efficient capital markets.
B. The market value or market price of the asset is determined by the interaction of demand and supply for the security in the market. Intrinsic values are estimated in light of all the available information regarding the security. Estimates of intrinsic values are derived by forecasting the amount and timing of the security's future cash flows, and then discounting them at an appropriate discount rate.
Statement 1: Studies have found that securities markets are strong‐form inefficient, which implies that investors can earn superior returns based on material nonpublic information. Statement 2: Studies have found that securities markets are semi‐strong form efficient, which implies that investors cannot earn superior returns based on financial analysis. Which of the following is most likely? Only one statement is correct. Both statements are incorrect. Both statements are correct.
Both statements are indeed correct.
Increasing the cost of borrowing shares most likely: Enhances market efficiency. Has no impact on market efficiency. Hinders market efficiency.
Higher cost of borrowing shares limits short selling, which impedes market efficiency
If a security's market price is greater than its intrinsic value, the investor should most likely: Buy the security as it is undervalued. Sell the security as it is overvalued. Buy the security as it is fairly valued.
If a security's market price is greater than its intrinsic value, it is overvalued and the investor should sell it.
If markets are semi‐strong form efficient, portfolio managers should most likely follow: Active portfolio management. Passive portfolio management. Both active and passive portfolio management.
If markets are semi‐strong form efficient, active management is not likely to earn superior risk‐adjusted returns on a consistent basis. Therefore, passive portfolio management strategies should be pursued
Which of the following is most accurate regarding an inefficient capital market? Market Prices and Intrinsic Values: Preferred Investment Strategy: A Differ Passive B Are the same Active C Differ Active
In inefficient capital markets, opportunities may exist for an active investment strategy to achieve superior risk‐adjusted returns as market prices differ from securities' intrinsic values.
Intrench Value
Intrinsic value or fundamental value is the value of the asset that reflects all its investment characteristics accurately. Intrinsic values are estimated in light of all the available information regarding the asset; they are not known for certain. Both tangible and intangible items. may or may not match price
Which of the following least likely contributes to market efficiency? Low transaction costs Large number of active market participants Limits to trading
Limitations on trading reduce market efficiency.
Consider the following statements: Statement 1: In efficient capital markets, prices only adjust to reflect new information that comes to the market. Statement 2: In efficient capital markets, the time taken by security prices to reflect new information is long enough for traders to earn profits with little risk. Which of the following is most likely? Only one statement is correct. Both statements are incorrect. Both statements are correct.
Only Statement 1 is correct. In efficient capital markets, the time frame required for security prices to reflect any new information is very short.
Under which of the following efficient market hypotheses is an investor least likely to earn consistent abnormal returns based on financial analysis? Weak form only Strong form and semi‐strong form only Weak form and semi‐strong form only
Semi‐strong form EMH asserts that investors cannot earn abnormal risk‐adjusted returns if their investment decisions are based on important information after it has been made public. Strong‐form EMH encompasses semi‐strong form EMH.
Under which of the following efficient market hypotheses is a company director least likely to earn abnormal returns consistently? Weak form and semi‐strong form only Semi‐strong form and strong form only Strong form only
Strong‐form EMH asserts that no one can consistently achieve abnormal risk‐adjusted returns.
Which of the following efficient market hypotheses assumes that all information is cost‐free and available to everyone? Weak form Semi‐strong form Strong form
Strong‐form EMH assumes that all information is cost‐free and available to everyone.
Under which of the following efficient market hypotheses is an investor most likely to earn an abnormal return based on dividend announcements? Weak form Semi‐strong form Strong form
Weak‐form EMH asserts that abnormal returns cannot be easily earned by using trading rules and technical analysis. It does not encompass security market information.
