Homework Answers
21.
PE is the ratio for valuing the company based on current market price in relation to earnings per share.
PE ratio = Market Price / EPS.
Hence, Stock price is the product of EPS and PE.
22.
d. Only new unexpected information can change prices is not the assumption of Efficient Market Theory.
23. There are three types of level in this theory.
Weak, semi strong and strong.
The weak form reflects the data based on past prices and no technical analysis will help the investors in making the estimate of future stock prices.
The semi strong reflects the belief that because all information that is public is used in the calculation of a stock's current price, investors cannot utilize technical or fundamental analysis to gain big returns.
Whereas the strong form reflects the belief on the information available to the public and some information which is not publicly known is completely accounted for in current stock values.
Hence strong level assumes non public information is reflected in prices.
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