Question

Please correctly answer all parts of question 7 with the answer choices provided.

7. Efficient markets hypothesis Aa Aa he concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security-such as a share of a particular corporation's common stock-should be the present value estimate of the firm's expected cash flows discounted by its appropriate rate of equal to lled the intrinsic value of the stock) more than Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to "beat" the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices.

Answer 1

1. When financial markets are efficient the price of security should be equal to the present value estimate of the firm’s expected cash flow.

The reason for the above is that when market is efficient the stock price incorporates the information quickly and price becomes equal to its intrinsic value.

2. The statement is consistent with strong form efficiency as it reflects all information contained in past price movements.

3. Semi strong form of efficiency shows that market price of the stock will quickly adjust to the publicly available information.

When the company releases its next earnings , the stock price will increase and settle at a new equilibrium level as the insider information of higher earnings is not yet incorporated in the stock price.