Chapter 14, Problem 15CQ

Efficient Market Hypothesis Aerotech, an aerospace technology research firm, announced this morning that it has hired the world’s most knowledgeable and prolific space researchers. Before today, Aerotech’s stock had been selling for $100. Assume that no other information is received over the next week and the stock market as a whole does not move.

1. a. What do you expect will happen to Aerotech’s stock?
2. b. Consider the following scenarios:
   1. i. The stock price jumps to $118 on the day of the announcement. In subsequent days it floats up to $123, then falls back to $116.
   2. ii. The stock price jumps to $116 and remains at that level.
   3. iii. The stock price gradually climbs to $116 over the next week.

Which scenario(s) indicate market efficiency? Which do not? Why?