Question

Which of the following observations appear to indicate market inefficiency? Explain whether the observation appears to contradict the weak, semi-strong, or strong efficiency.

1. a) Tax-exempt municipal bonds offer lower pretax returns than taxable government bonds
2. b) Managers make superior returns on their purchases of their company stock.
3. c) There is a positive relation between the return on the market in one quarter and the change in aggregate profits in the next quarter
4. d) There is evidence that stocks which have appreciated unusually in the recent past continue to do so in the future.
5. e) The stock of an acquired firm tends to appreciate in the period before the merger announcement.
6. f) Stocks of companies with unexpectedly high earnings appear to offer high returns for several months after the earnings announcement.
7. g) Very risky stocks on average give higher returns than safe stocks

Answer 1

a.There is no contradiction in mind of investor regarding investment in municipal bonds or investment in taxable govt bonds.

b.Managers make superior returns on their purchases of their company stock express strong market efficiency.

C.There is a positive relationship between the return on the market in one quarter and the change in aggregate profits in the next quarter ,no contradiction.

d.There is evidence that stocks which have appreciated unusually in the recent past continue to do so in the future not express true view that means its express weak efficiency.

e.The stock of an acquired firm tends to appreciate in the period before the merger announcement. is strong form of market efficiency.

f.Stocks of companies with unexpectedly high earnings appear to offer high returns for several months after the earnings announcement Express semi-strong form.

g. Very risky stocks on average give higher returns than safe stocks no contradiction.