Gotterdammerung Corporation is in the specialty chemicals industry. Rheingold Group Inc. purchases various chemical compounds from Gotterdammerung and uses them in its pharmaceuticals at a 40% margin and has been doing so for years. At the end of 2022, Rheingold announced third stage clinical trials of a new drug it developed, which had been expected to be a block-buster were disappointing and its development was being discontinued. Rheingolds stock price declined moderately after the announcement. In addition, over the past five years, Rheingold 's performance has not been good and in early 2023 its auditor raised doubts about the firms ability to continue as a going concern due to Rheingolds weak liquidity position. The stock price declined significantly when the auditor report was released.

By the end of the first quarter of 2023 and early in the second quarter, rumors of a takeover of Rheingold by Gotterdammerung were reported by the financial media. Many of the reports claimed unidentified top-level directors of both companies supported the acquisition. Rheingolds stock price rallied moderately on the rumors. On May 15, in a press conference, officials of Gotterdammerung declared the company would not acquire Rheingold but would instead provide a substantial cash loan to Rheingold.

New legislation regulating the chemical and pharmaceutical industries was enacted by the government in January 2023. The act requires manufacturers to make large investments to prevent contamination of the environment by chemicals and pharmaceuticals. The act became effective in the first week of May, and the share price of Gotterdammerung declined 25% over the following week.

Which of the following comments about market efficiency of Gotterdammerung's shares is most likely true?

1. The market is highly efficient, as the share price of Gotterdammerung decreased as soon as the new legislation came into force.
2. The market is inefficient, as investors in Gotterdammerung pursued short-term goals instead of preferring long-term investment benefits.
3. The market is inefficient, as the market value of Gotterdammerung's shares does not appear to reflect its intrinsic value between January and May.
4. All of the above answers are correct.
5. None of the above answers are correct.

14. Refer to the information in question 13. Which of the following comments about market efficiency of Rheingolds shares is most likely true?

1. The market is efficient, as the share price of Rheingold decreased when the new drug program was discontinued.
2. The market is efficient, as the share price of Rheingold decreased when the auditor report was released.
3. The market is efficient, as the share price of Rheingold increased on the acquisition rumors.
4. All of the above answers are correct.
5. None of the above answers are correct.