Madison was hired to design and decorate the offices of a large pharmaceutical company

Madison was hired to design and decorate the offices of a large pharmaceutical company.  She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration.  She immediately bought the company's stock which doubled in price over the following week.  This outcome is inconsistent with

A) the weak-form efficient market hypothesis.

B) the semi-strong form efficient market hypothesis.

C) the strong form efficient market hypothesis.  Her action was probably illegal.

D) all of the above.

Stock prices go up when there is positive information about a company, and go down when there is negative information about the company.

Answer:  TRUE

Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.

Answer:  TRUE

If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock.

Answer:  FALSE

If an individual with inside information can make higher than expected profits, the market is no more than semi-strong form efficient.

Answer:  TRUE

Under the efficient market hypothesis, would securities be properly priced.

Answer:  If markets were perfectly efficient, then investors would price a stock based on the company's expected future cash flows, so at any time the security would be properly priced. If good news becomes available, that would tend to increase the expected cash flows to a company, the stock price will go up, meaning that the new price is then the proper price for the stock.

Are markets moving toward being more efficient or toward being less efficient?

Answer:  Empirical evidence shows that since about the year 2000 pricing anomalies have diminished considerably. Hedge funds have been trying to exploit pricing inefficiencies, and by doing so, eliminate the inefficiencies. Hence, the market appears to be becoming more efficient over time.

Why do the arithmetic average return and the geometric return differ?

Why do the arithmetic average return and the geometric return differ?

Answer:  The arithmetic average return does not take what the value of the investment was at the start of each period. Hence, even though a company may have the same arithmetic return for two consecutive years, the dollar amount of those returns will be different in later years than in the first year. For instance, if the investor started with $1,000, and earned 20% the first year, lost 20% the second year, and earned 15% the third year, the average arithmetic return would be 5%, and the 20% gain the first year would be $200, but the 20% loss the second year would be $240. The investment would be worth $1104 after three years, giving an average geometric return of 3.35%, different from the average arithmetic return.

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT

A) There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S. Government and the price of Boeing quickly goes up.

B) ACG, Inc. performed well for the past six months, but they just lost a major distribution contract, but the price of ACG stock continues to go up.

C) Louisville Slugger, Inc., gets a contract to supply bats for Little League play, a contract it never had before, and stock price remains stable.

D) Muguet Company consistently underperforms the market in October, but outperforms the market in May.

Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average.  This outcome supports

A) the weak-form efficient market hypothesis.

B) the semi-strong form efficient market hypothesis.

C) the strong form efficient market hypothesis. 

D) all of the above.

Which of the following is consistent with the efficient market hypothesis?

A) so-called value stocks outperform growth stocks.

B) stocks that have performed well over the past year continue to perform well for several more months.

C) a company announces higher than expected sales and earnings.  The stock price immediately increases by 10%. 

D) a company announces higher than expected sales and earnings.  The stock price remains unchanged.