Question

Are the following statements true?
Statement 1: The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor.
Statement 2: Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect an abnormal price change immediately after the announcement.

	A.	Yes.
	B.	No. Both are not true.
	C.	No. Only statement 1 is true.
	D.	No. Only statement 2 is true.

Answer 1

This question is based on the efficient market hypothesis.

Statement1.the anomalies of the efficient market hypothesis are:
1. The size effect.
2. The valuation effect.
3. The momentum effect.

As per, The valuation effect:
The companies with high book to market value ratio have outperformed historically, compared to those companies with low book to market value ratio.

Answer: True.

Statement 2. This is an efficient market.

As per the Efficient market hypothesis:

The security prices already reflect all the available information.

The efficient market hypothesis says that past price movement, earnings report and volume traded doesn't affect stocks Current price and can't be used to predict the stocks future directions.

Answer: FALSE.

Main Answer:
C. No. Only statement 1 is true.

.