3. Efficient Markets

Question 1

What are the four types of efficiency

Answer 1

Operational : minimal transaction costs

Allocations: funds allocated to most productive users

Informational: freely available and cheap

Pricing: prices fully and fairly reflect all relevant information

Question 2

What can happen to a share price if good news is announced

Answer 2

Slow reaction
Anticipatory price movement
Over reaction followed by deflation
Persistent inefficiency

Question 3

What makes a market efficienct

Answer 3

When prices instantly and fully reflect all relevant available information in an unbiased way
Over/undervalued stocks is not possible
Outperforming the market is not possible

Question 4

What are the conditions needed for an efficient market

Answer 4

Lots of trading 
Homogenous product 
No transaction costs/ barriers to trade
Free and available info 
Rational investors

Question 5

What are the 3 levels of market efficiency

Answer 5

Weak - prices fully reflect info about past share movements

Semi strong - prices reflect all publicly available info

Strong - prices reflect all info public or private

Question 6

HM plc has 200m shares in issue & the share price is £2.50 on OCT 10th

On Oct 12th HM plc wins a contract to build a bridge, their wealth is expected to increase by £20m. This is due to be announced in Oct 14th

What is the companies market cap ?
What will happen to the share price and when ?
What would be different in a strong market ?

Answer 6

£500m

Share price will increase to £2.60 on Oct 17th

In a strong market it would increase on the 14th

Question 7

What are the efficient market anomalies

Return greater then risk taken

Answer 7

Timing effects
Small firms
Surges and bubbles