Question

1. Best buy Inc shares hit a new record on Tuesday after it reported better-than-expected quarterly profit, fueled by the growth of higher-margin businesses during the fiercely competitive holiday quarter.

Why did the stock market respond this way? Is this consistent with the predictions of the Efficient Market Hypothesis? Why or Why not?

Answer 1

Stock market respond this way because investors sometimes value a company based on expectations about profits. If actual profit turns out be more than expected, share price will rise. Growth of high margin businesses also indicates that company is going to do good business and profits in upcoming future which also boosts market sentiments and increase the share price.

It is not consistent with the predictions of efficienct market hypothesis beacuse the hypothesis states that share prices reflect all the information and it is impossible to purchase undervalued and overvalued stocks. But in this case, company's stock price is rising due to better future expectations not solely by its past performance. Moreover, stock bubble and information bias can also increase the stock price in contrast to efficient market hypothesis.