Question

In: Finance

A firm announced unexpected news on the government rejection of its new drugs. The stock price...

A firm announced unexpected news on the government rejection of its new drugs. The stock price plumed by $5 immediately and remained unchanged since that. What kind of market efficiency does this event relate to? weak form market efficiency. semi-strong form market efficiency. strong form market efficiency. all-around form market efficiency.

Solutions

Expert Solution

Let us first understand these three form of market efficiency.

1) weak form of market efficiency: in this form of market share price reflects all the past and present information of securities related data. Teachnical analysis is useful for investment in such kind of markets.

2) semi strong market: this form of market efficiency is an extension of weak from as it not only covers the security market related information but it also covers other past and present information related to the economy, industry in which the company operates, news and article related to the company, Fundamental analysis is useful in this case.

3) strong markets : this form not only includes public information, It also includes the private informations, No analysis is useful in these type of markets however insider trading can be useful but insider trading is illegal in most of the country so generally these type of market don't exist.

Since in this given question, Firm announced the information of drug rejection( i.e. informationwas made public), on which the stock price reacted since he price reacted on a public news, the market is semi strong.


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