Attempts: Keep the Highest: 13 7. Efficient markets hypothesis Aa Aa True or False: The efficient markets hypothesis holds only if all investors are rational. True False Almost all 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 available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Consider the following statement, and identify the form of capital market efficiency under the efficient market hypothesis based on this statement: Current market prices reflect all relevant publicly available information, This statement is consistent with: Ooo Strong-form efficiency Weak-form efficiency Semistrong-form efficiency Consider that there is a weak-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 analyst forecast for the company's eamings 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 eamings report? The stock price will not change, because the market already incorporated that information in the stock price when the announcement was made. The stock price will increase and settle at a new equilibrium level. There will be some volatility in the stock price when the eamings report is released, but it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the news announcement