Question

1: 

True or False: The efficient markets hypothesis holds only if all investors are rational.

False

2: 

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.

Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement:

Current market prices reflect all relevant information, whether it is known publicly or privately.

This statement is consistent with:

Strong form efficiency

3: 

A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company’s earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report?

The stock price will not change, because the market already incorporated that information in the stock price when the announcement about FDA approval was made.