Question

(a) What are the key features of an efficient market?         

(b) If a market is efficient how will share prices vary?

(c) Most investment managers are now looking to invest in a range of different countries. Describe the three categories of risk that they need to consider and give three examples of each category.

Answer 1

a) A market is indeed said to be efficient in a perfect competition if it gets to operate under the conditions

1) Perfect information has to be available both to the consumers as well as the producers and the should be no scope for inadequacy

2) In a perfect competition, there should be homogeneity of the product

3) There should be numerous competitors with no price leadership

4) There should be freedom of entry and exit.

(b) If a market is efficient, the share prices vary accordingly with the changes in the supply and demand of the product on the whole.

(c) (I) Budget Risk : A budget risk is indeed any sort of risk that highly influences your financial performance.

Eg- the risk of economic downturn, the risk of new low prices product entering the market.

(II) Schedule risk : A schedule risk is indeed a overall financial risk where your financial status might not change but may be the cash flow changes. Schedule risk might also take the form of external factor risk

Eg- Risk with a contractor changing the schedule due to remodeling

(Iii) Quality risk : It is nothing but the issues with the quality of a product which can ultimately trigger to budget risk

Eg- Increased warranty expense due to poor quality products.