Question

Which of the following scenarios is inconsistent with a semistrong-efficient market?

Multiple Choice

• A. Veeva's CEO sold 100,000 shares of the company on Apr 1, 2017 for $56 per share. On Apr 6, Veeva reported disappointing operating results which caused the stock price to plummet to $40.

• B. Lyft's stock price jumped 15% from the IPO price when it started trading on Mar 28, 2019, its IPO day. The closing price was almost the same as the opening price.

• C. Netflix's stock price jumped 12 percent on the day it announced higher-than-expected growth rates in revenue. The price kept rising in the subsequent 5 trading days with a total return of 8 percent.

• D. When rumor came out on Sept 8, 2010 that Steve Jobs was hospitalized due to a heart attack, Apple's stock price plummeted by 10 percent within seconds.

Answer 1

Option B. Lyft's stock price jumped 15% from the IPO price when it started trading on Mar 28, 2019, its IPO day. The closing price was almost the same as the opening price.

Semi-strong efficient market states that the current stock price is adjusted by all the available public information. The new price has factored all the available information and thus reaches a new equilibrium.

Veeva's price gets adjusted to disappointing operating results and thus falls to $40.

Netflix price had jumped by 12% after the announcement of higher than expected growth rates in revenue.

Also, Apple's price dropped by 10% followed by the information that Steve Jobs was hospitalized.

Therefore, in all the above cases, the price has reacted to he publicly available information.

Only Option B has no public available information which has affected the price and was just a a normal IPO day with a rise in price and the gradual decrease to make the closing price equal to opening price.