Question 1 (a) Identify the type of information that can beat the market under each form...

Question 1

(a) Identify the type of information that can beat the market under each form of market efficiency.

(b) Janet, a junior analyst of an investment bank, kept an eye on the share price of Temcent Company, a fintech company with abundant analysts’ coverage. She noticed that the share price was increased by 10% immediately after the release of annual result announcement.

She said to her senior colleague, Ricky, “The share price of Temcent is over-reacted to the result announcement. Net profit was just grown by 1% last year. This is an example of violation of semi-strong-form market efficiency.”

Ricky replied, “It’s not the case. The market is semi-strong-form efficient even though the stock price goes up after the result announcement.”

Explain why Ricky is correct.

Solutions

Expert Solution

1. A. Under each type of market efficiency NEW INFORMATIONS can always beat the market efficiency as all three types of efficiency are related to public or private informations have already been discounted into the price.

Only new informations have not been discounted into the price and they have the capability of moving the markets.

1. B. The market price of share went up after the earnings because of the semi strong form of efficiency. The post earning announcement drift is a common contradiction of semi efficient form of market. Ricky is correct because since earnings are private informations and only management are known about it they are not discounted into the price because of the semi efficient market theory.

According to semi efficient markets only the publicly available informations have already been discounted into the price,private informations have not been discounted into the price so management is known of the results and it is not discounted into the price because it is a private information.

jeff jeffy answered 1 year ago

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