Question

Two weeks ago Acme Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Acme common stock closed at $20. On the day following the announcement, Acme closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Acme stock traded at $26, a level it has maintained since then. This is an example of a(n):

• underpricing.

• pre-activity action.

• efficient market reaction.

• delayed reaction.

• over-reaction and correction.

Answer 1

Answer:

Correct answer is:

delayed reaction.

Explanation:

Given:

Acme common stock closed at = $20.

On the day following the announcement, Acme closed a = $21.

Two days after the announcement the stock closed = $22.50.

Four days after the announcement the stock traded = $23.

Last week, Acme stock traded at $26, a level it has maintained.

As information flows, price is going up. This is example of delay in market reaction.

This is neither a case of under-pricing nor efficient market reaction nor over-reaction and correction.

As such option D is correct and other options A, B, C and E are incorrect.