Indicate whether the following statements are True or False and explain your answer. 1. The strong...

Indicate whether the following statements are True or False and explain your answer.
1. The strong form of the efficient markets hypothesis (EMH) states that even an investor armed with both public and insider information cannot consistently earn superior returns.

2. Investment banks generally specialize in lending money whereas commercial banks typically help companies raise capital from other parties.

3. A negotiable certificate of deposit would be considered an example of a capital market instrument.

4. You notify your broker to sell 500 shares of AT&T stock that you own. This is considered a primary market transaction.

5. A share of common stock is not a derivative but an option to buy the stock would be an example of a derivative.

Expert Solution

Answer

1) TRUE

Efficient market hypothesis is the strongest form of efficient market hypothesis. In this, present price of stock is already adjusted for the public and inside information. so, no information can benefit an investor to earn higher returns.

2) TRUE

Investment bank helps companies in raising capital by issuing securities. It helps companies to go public and sell debts to investors. Commercial bank, on the other hand, accepts deposits and lend it to other parties including companies.Unlike commercial banks, Investment bank donot take deposits from other parties.

3) FALSE

A negotiable certificate of deposit is money market instrument. Money market instrument are short term instruments which mature within a year. It is short term borrowing or lending with almost no risk.

4) FALSE

There are two type of Capital market: Primary Market and Secondary market. In Primary market, new securities are initially issued to investors. Companies raise capital from primary market. In Secondary market, already existing securities are purchased and sold.So notifying broker to sell already existing stock is a secondary market transaction.

5) TRUE

A share of common stock is equity share of the company whereas stock option is a derivative. Stock option gives puchaser share at future date . Value of stock in stock option depends upon underlying stock. hence, it is a derivative.

jeff jeffy answered 1 year ago

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