Question

Efficiency of stock markets is one of the crucial assumptions for the stock price maximization objective....

Efficiency of stock markets is one of the crucial assumptions for the stock price maximization objective. Assuming that the markets are perfectly efficient which of the following is the correct stock price response after a surprise good news?

a.

An immediate increase in the stock price on the announcement but no price drift thereafter

b.

An immediate increase in the stock price and a gradual decrease in the days thereafter

c.

No change in stock prices

d.

An immediate increase in the stock price and a gradual increase in the days thereafter

Answer C - no change in stock prices, was Incorrect!!!

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Answer #1

The markets are perfectly efficient then, any type of surprise good news will be discounted into the price quickly but it will be adjusted with time so, there will be an immediate increase in the stock price but there will be a gradual decrease in this thereafter in order to adjust so it would be an example of an Efficient market.

All the other options are false.

Correct answer is option (B) An immediate increase in the stock price and gradual decrease in days thereafter.

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