1. The informational efficiency of financial markets determines the ability of investors to beat the market and earn abnormal returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available.

Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Consider the following statement: Current market prices reflect all relevant publicly available information.

Identify the form of capital market efficiency based on the preceding statement: which one is correct?

a) Semistrong-form efficiency

b) Weak-form efficiency

c) Strong-form efficiency

2. A pharmaceutical company announces that it has received Food & Drug Administration (FDA) approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the companys earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. If the markets are assumed to exhibit weak form efficiency, what will happen when the company releases its next earnings report?

a) The stock price will increase and settle at a new equilibrium level.

b) The stock price will not change, because the market already incorporated that information in the stock price when the announcement was made.

c) There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the announcement.

3. The degree of market efficiency affects investors and market participants but has important implications for financial managers as well. When markets are efficient and information is immediately reflected in market prices, required return on a security should be ?????? the expected return on the security.

a) Equal to

b) Greater than