8. The efficient markets hypothesis The concept of market efficiency underpins almost all financial theory and decision models. When financlal markets are efficient; the price of a security -such as a share of a particular corporation's common stock-should be the present value estimate of the firm's expected cash flows discounted by its appropriate rate of retum (also called the intrinsic value of the stock). Almost ali financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to "beat" the market and eam excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes avalable. Financial theorists have identifidd three levels of informational efficiency that reflect what information is incorporated in stock prices. Identify the form of capital market efticiency under the efficlent market hypothesis described in the following statement: Current market prices refiect all relevant publicly avallable information, This statement is consistent whah: Semistrong form efficiency strong form ethiency. Weak form efricency Consider that there is a semistrong form of efficlency in the markets. A pharmaceutical company announces that it has received federal Orug Administraticn approval for a new aliergy drug that completely prevents hay. fever. The censensus analyat forecast for the company's earnings per ahare (f.pS) is $4.50, but insiders know that, with this new drug, eamings will The concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security -such as a share of a particular corporation's common stock-should be the present value estimate of the firm's expected cash flows discounted by its appropriate rate of return (also called the intrinsic valu. Almost all financial theory and decision models assume that the financial ficient. The informational effiency of financial markets determines the ability of investors to "beat" the market and earn excess; Acient. The informationar efficiench on their investments. If the markets are efficient, they wie react rapidily as new relevant information becomes avallable. Financial theorists have identified three levels of informational efficlency that reflect what information is incorporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reffect all reievant publich avaliable information. This statement is consistent with: Sernistrong form efficiency Strong form efficiency Weak form eficiency Consider that there is a semistrong form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analirt forecast for the comparrys eamings per share (EPS) is \$4.50, but insiders know that, with this new drug, eamings will Increase and drive the EPS to s5.00: What will happen when the company releases its next eamings report? Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reflect all relevant publidy avaliable information. This statement is consistent with: Semistrong form efficiency Strong form efficiency Weak form efficlency Consider that there is a semistrong form of efficiency in the markets. A pharmaceutical company anniounces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's 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. What will happen when the company releases its next earnings report? The stock price will increase and settle at a new equilibrium level. The stock price will not change, becouse the market already incorporated that information in the stock price when the announcement was made. There will be some volatility in the stock price when the eamings report is released; it is diffcuif to determine the impoct on the stock price