1. According to the efficient market hypothesis (EMH), in a perfect market, the security prices reflect the true and fair value of all the underlying securities' assets at any time. On the contrary, an inefficient market is a market whose security price at any time does not entirely reflect the value of its assets. In this form of market, traders can beat the market because they can employ strategies like arbitrage and speculation. Explain with example, the price reactions towards the bad news that indicate market is inefficient.

1. According to the efficient market hypothesis (EMH), in a perfect market, the security prices reflect the true and fair value of all the underlying securities' assets at any time. On the contrary, an inefficient market is a market whose security price at any time does not entirely reflect the value of its assets. In this form of market, traders can beat the market because they can employ strategies like arbitrage and speculation. Explain with example, the price reactions towards the bad news that indicate market is inefficient.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 4BIC

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Which is correct about security valuation? A. In an efficient market, several factors would affect the market and value is not necessarily equals the price. B. The value of the security is determined to compare it with the current market price and usually investor would buy when the value equals the price. C. Sellers would prefer the accept lower bid price than higher bid price to realize gains. D. Investors buy securities when securities are underpriced and sell them when it is overpriced. E. All of the above F. None of the above
According to the efficient market, which of the following are not true? Select one: securities are in equilibrium prices fully reflect all public information available the investors should not waste their time on under- or over-valued securities None of the answers are correct the market has demonstrated that stocks are not reasonably priced.
Riskless, costless arbitrage is the cornerstone of the efficient market hypothesis. However, multiple unavoidable risks in securities markets inhibit arbitrage as defined in financial theory (and investment textbooks) from successfully eliminating mispricing. Please list two of these unavoidable risks and briefly explain how each limits arbitrage in practice. Use an example to make your case for each risk. View keyboard shortcuts
Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.
Although a company would never dispel gains from currency fluctuations, they truly hate accounting for the losses. This is why minimizing risk is so important. It is absolutely necessary to retain a firm’s profits from selling a product or providing a service. Please consider the following questions: What is the purpose of a hedge? How does a hedge operate? Provide an example of three hedging strategies. Of the three, which do you prefer?
Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant makes the following arguments:a. Both the CAPM and APT require a mean-variance efficient market portfolio.b. Neither the CAPM nor the APT assumes normally distributed security returns.c. The CAPM assumes that one specific factor explains security returns but APT does not.State whether each of the consultant’s arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.
Which of these statements below are correct? (a) Small arbitrage opportunities may occasionally exist in real markets due to lack of information. (b) If there is an arbitrage opportunity, it means one can make a risk-free profit. (c) Arbitrary investments and arbitrage generating investments are basically the same (d) The no-arbitrage price of a bond is equal to its present value. (e)The law of one price is based on the no-arbitrage assumption.
According to the efficient market, which of the following are not true? Select one: securities are in equilibrium prices fully reflect all public information available the investors should not waste their time on under- or over-valued securities None of the answers are correct the market has demonstrated that stocks are not reasonably priced. Clear my choice
Mark thinks that there is an interesting paradox of the efficient market hypothesis. If the market believes that prices reflect all information, investors will stop seeking mispriced securities. This may lead to more mispriced stocks and more inefficiency. However, if the market believes that inefficiency still exists, the competition of trying to be the first to find mispriced securities will make markets more efficient. Do you agree with Mark? Why or why not? Please briefly comment.
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