Question

1. In a market we observe that the trading costs are low. Yet the stock prices fluctuate without the arrival of any significant news. We would consider this market to be:

		operationally efficient.
		informationally efficient.
		both operationally and informationally efficient.
		not efficient in either sense.

2. A company has 2 million shares of common stock outstanding and the stock is priced at $15. What will be the increase in the market cap of the company if the stock price increased by 10%?

		$1.5 million
		$2.5 million
		$3 million
		$5 million

Answer 1

Correct Answer:

C

Since the trading cost has been lowered, then it is operational efficiency in the stock market. further, stock prices are absorbing minor information and even those information that is private in nature and fluctuate, then it is informational efficiency in the stock market.

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Correct Answer:

C

Working note:

increase in market capitalization = increase in price * number of shares outstanding

increase in market capitalization = (15*10%)*2 Million

increase in market capitalization = $3 Million