Your friend approaches you to provide advice on the mechanisms within the financial market, how prices are set and the concept of the incorporation of information into prices.

With reference to efficient markets provide your friend with a short, 300 word description regarding how prices are set and how this information is incorporated into prices. In addition, what is the implication for finance managers and their decision making process?

(6 marks)

In the same vein, your friend wishes to know more about the mathematics of returns and has provided the historical prices of Algotech Ltd. She does not understand the difference between arithmetic and geometric returns of a stock or the implications of both of these averages. Your objective is to show her the differences between these. Algotech Ltd. has not paid any dividends in recent history.

The following table contains the prices provided by your friend.

Year	Price
0	100
1	110
2	95
3	90
4	105
5	100

Identify the yearly returns for Algotech Ltd.

(2 marks)

Calculate the arithmetic and geometric average rates of return.

(3 marks)

With specific reference to the averages and prices of Algotech Ltd, describe the differences and implications to investors of the two averages.

(6 marks)