Reading 55: Market Efficiency and Anomalies - LOS a ～ Q1 class, statements, efficient, following

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1.David Farrington is an analyst at Farrington Capital Management. He is aware that many people believe that the capital markets are fully efficient. However, he is not convinced and would like to disprove this claim. Which of the following statements would support Farrington in his effort to demonstrate the limitations to fully efficient markets?

A)   Stock prices adjust to their new efficient levels within hours of the release of new information.

B)   Fundamental analysts are poring over the same new information that is disseminated to the public, so they do not provide any added value to the efficiency of the markets.

C)   Technical analysis has been rendered useless by many academics who have shown that analyzing market trends, past volume and trading data will not lead to abnormal returns.

D)   Processing new information entails costs and takes at least some time, so security prices are not always immediately affected.

2.Which of the following is a limitation to fully efficient markets?

A)   The gains to be earned by information trading can be less than the transaction costs the trading would entail.

B)   Information is always quickly disseminated and fully embedded in a security’s prices.

C)   In general, for securities with smaller transaction costs, the deviations from informationally efficient prices are greater than for securities with larger transaction costs.

D)   There are no limitations to fully efficient markets because the trading actions of fundamental and technical analysts are continuously keeping prices at their intrinsic value.

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答案和详解如下：

1.David Farrington is an analyst at Farrington Capital Management. He is aware that many people believe that the capital markets are fully efficient. However, he is not convinced and would like to disprove this claim. Which of the following statements would support Farrington in his effort to demonstrate the limitations to fully efficient markets?

A)   Stock prices adjust to their new efficient levels within hours of the release of new information.

B)   Fundamental analysts are poring over the same new information that is disseminated to the public, so they do not provide any added value to the efficiency of the markets.

C)   Technical analysis has been rendered useless by many academics who have shown that analyzing market trends, past volume and trading data will not lead to abnormal returns.

D)   Processing new information entails costs and takes at least some time, so security prices are not always immediately affected.

The correct answer was D)

If market prices are efficient there are no returns to the time and effort spent on fundamental analysis. But if no time and effort is spent on fundamental analysis there is no process for making market prices efficient. To resolve this apparent conundrum one can look to the time lag between the release of new value-relevant information and the adjustment of market prices to their new efficient levels. Processing new information entails costs and takes at least some time, which is a limitation of fully efficient markets.

2.Which of the following is a limitation to fully efficient markets?

A)   The gains to be earned by information trading can be less than the transaction costs the trading would entail.

B)   Information is always quickly disseminated and fully embedded in a security’s prices.

C)   In general, for securities with smaller transaction costs, the deviations from informationally efficient prices are greater than for securities with larger transaction costs.

D)   There are no limitations to fully efficient markets because the trading actions of fundamental and technical analysts are continuously keeping prices at their intrinsic value.

The correct answer was A)

Market prices that are not precisely efficient can persist if the gains to be made by information trading are less than the transaction costs such trading would entail.