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1.Complete the following sentence. If prices capture all relevant information, then the prices will follow a ____________.
Select one:
Random walk
Predictable pattern
2.The market is strong-form inefficient when
Select one:
A.Any party in possession of value-relevant information can benefit from the information before the firm releases it to the public.
B.Prices do not move before the public announcement of the value-relevant information.
C.Only key personnels (such as CEOs, members of the board, etc.) of a firm can benefit from value-relevant information before the firm releases it to the public.
D.Prices only move after the public announcement of the value-relevant information.
3.You have set your sights on a new iPhone X (64 GB). You have two options: 1. A 2 year plan which includes the phone at €58 a month
2. Buy the phone for €977 now and get a 2 year sim-only plan for €23 a month. The consumer credit rate is quoted at 3% per year (.25% per month).
a. What is the present value of the payments in option 1?
b. Now calculate the present value of option 2. Which option should you take?
1.Summary of the question :
If price captures all relevant information, then the prices will follow a _________
Answer :
Predictable pattern
Reason : Based on the Efficient Market Hypothesis, which states that all relevant information is reflected in the share prices, then the price would be predicatble. However, this is not only the current information but also expectations about future incomes. Since future information is presently not available, the share price tends to take a random walk....i.e move in any direction.
So if prices were to capture all relevant information, it would follow a predictable pattern. But actually prices do not capture all relevant informaiton because all information is not available to all investors. hence, prices dont capture all information and that is why they may move in any direction.
2.
A. CORRECT
REASON :
STRONG FORM OF INEFFICIENCY :
Characterised by : 1. STOCK PRICE DOES NOT REFLECT ALL INFORMATION WHETHER PUBLIC OR PRIVATE
2. INVESTORS CAN OUT-PERFORM MARKET IF THEY HAVE RELEVANT INFORMATION THAT IS NOT YET RELEASED .
B AND D. INCORRECT
REASON : PRICE MOVING AFTER PUBLIC ANNOUNCEMENT IS A SIGN OF SEMI- STRONG EFFICIENCY.
C. INCORRECT
REASON : IF RELEVANT INFORMATION IS AVAILABLE , IT CAN BE UTILIZED TO EXPLOIT INEFFICIENT MARKET BY ANY INVESTOR REGARDLESS OF THEM BEING INSIDERS OR NOT. CASES ARE KNOWN WHERE INSIDERS HAVE SOLD INSIDER INFORMATION TO INVESTORS.
3.
a. PV in option 1 = Amount * PVAF@0.25% for 24 times
= 58 * 23.26598
= 1349.427
b. PV in option 2 = Amount * PVAF@0.25% for 24 times + 977
= 23 * 23.26598 + 977
= 535.1175 + 977
= 1512.118
Hence, Option 1 is better as it leads to less PV.
