Question

You are currently looking for a new stock to invest in. Through a friend, you hear that Evaporite SYstems has just successfully completed testing on a new system to eliminate wastewater which will make all other systems obsolete, and have partnered with a major petroleum development company to bring it to market. Describe under which form(s) of market efficiency it would be worth your time and effort to invest in this company, and under what form(s) of efficiency, it would not be feasible. Why is this the case?

Answer 1

Under semi efficient form of market, when the privately available information has not been discounted into the stock price and only publicly available information have been discounted into the stock price then an excess rate of return can be made through insider information and in this case,it is seen that it is an insider information that company has tested on a new system to eliminate waste water and it has partnered with the major petroleum development company so it can be seen that it is a private information and I will be investing in semi efficient form of market.

Under Weak form of market efficieny, current price are reflective of past trends and historical informations and they are not providing any prediction relating to future price so I will be investing in semi efficient form of market as well as weak form of market efficiency, because these informations are not reflected into the the actual market price of the company.

When there would be a strong form of market efficiency in which all the publicly available information, the privately available information have been discounted into the stock price and there is no scope for making an additional rate of return than the market rate of return so I will not be investing into strong form of market efficiency because that will not be helping in gaining any additional rate of return.