Question

a) Explain clearly the three forms of market efficiency. Why is it important for the market to be informationally efficient? (5 marks) b) Identify and explain which forms of efficiency are adhered to and/or violated in each of the following hypothetical situations: i. A group of students has created a trading rule which appears to outperform the UK market. ii. The return on professionally managed portfolios of equities is likely to be no better than that which could be achieved by an investor who holds the market portfolio. iii. Share prices usually seem to rise sharply in the first few days of a new fiscal year. However, this can be explained by the fact that many investors sell losing stocks just before the fiscal year in order to realise investment loss for tax rebate purposes. This causes abnormal downward pressure which is then released when the new fiscal year begins (Note: The fiscal year is the tax year 6th April - 5th April the following year) (8 marks) c) If the financial market is semi-strongly efficient, should the company care much about the way in which the future position of the company will be reflected in the company's financial statement? (2 marks) (Total 15 marks)

Answer 1

I am answering the first question as per the guidelines of Chegg. It is being requested to post separate questions.

1. Three form of market efficiency are strong form of market efficiency which will be advocating that all the publicly available information and privately available information have been discounted into the stock price.one can never beat the market in such form of efficiency.

Semi strong form of market efficiency will be advocating that publicly available information has been discounted into the stock price but privately available information have not been discounted into the stock price so there is an option of making an excess rate of return through insider trading.

Weak form of market efficiency will be advocating that historical price and past trends will be reflecting stock price and they cannot be used for future prediction of the stock price.

it is important for the market to be informationally efficient because it will help in rational decision making as well as prevention of fraud and rational investing.