Chapter 10 Market Efficiency

Question 1

How does understanding security valuation help managers?

Answer 1

provides guidelines about how to manage the business on behalf of shareholders

Question 2

what does the discount rate represent?

Answer 2

shareholder’s required rate of return

Question 3

If market prices reflect the actions of managers then managers must learn what?

Answer 3

what actions they should take in order to fulfill their legal and managerial responsibilities to shareholders

Question 4

What are the elements of market Efficiency

Answer 4

1. Operational Efficiency
2. Allocational Efficiency
3. Informational Efficiency

Question 5

what is meant by Operational Efficiency

Answer 5

transaction costs are low

- thereby, enhancing trading of securities

Question 6

what is meant by allocational efficiency

Answer 6

there are enough securities to efficiently allocate risk

Question 7

what is meant by informational efficiency

Answer 7

market prices fairly and quickly reflect all available information about the firm and managers’ actions

Question 8

the closer the link between manager’s actions and the firm, the more ___________________ efficient the capital market

Answer 8

informationally