Assuming stock markets are completely efficient, which company’s stock would you prefer to buy? (1) The...

Assuming stock markets are completely efficient, which company’s stock would you prefer to buy?

(1) The stock of a company that enjoys extremely high returns on its investments because the company operates in an industry where it holds a near monopoly position.

(2) A company that earns barely acceptable returns on its investments because the company operates in an industry that is highly competitive

Why, Explain?

Expert Solution

if the stock market are completely efficient then I can not make any excess rate of return and I will be buying the shares of the company which is having a Monopoly in the market because the company which is will be having a monopoly in the market will be having the pricing power and it will provide me with high rate of return because the company will be having the control over its competitive power and it will be trying to enhance its competitive edge through having a lot of competitive strength and uniqueness and hence the company will be able to generate strong revenues and it is able to post a strong profits because it does not have any competition in the industry and the industry is a highly monopolistic industry so I will be trying to invest into the company which have a higher Monopoly because if the prices are efficient in nature I will be trying to incorporate the the replicated return of company who is operating in Monopoly position

hence I will be buying the shares of the company which have a Monopoly position in the economy.

jeff jeffy answered 1 year ago

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