unexpected positive news

问题如下：

In a highly efficient market, unexpected positive news on a stock is announced to the public. After this announcement, the difference between the market value and the intrinsic value of the stock will most likely:

选项：

A.decrease. B.remain zero. C.increase.

解释：

Solution

1. Incorrect. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. In an inefficient market, (1) the market value of a stock adjusts slowly to an unexpected news, and (2) there are probably discrepancies between market value and intrinsic value. Therefore, only in an inefficient market could the difference between market and intrinsic values decrease after the announcement of an unexpected positive news.

2. Correct. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. Therefore, after the announcement, the difference between a stock’s market value and its intrinsic value will remain equal to zero because both market and intrinsic values adjust to reflect the unexpected news by the same amount and at the same time.

3. Incorrect. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. In an inefficient market, (1) the market value of a stock adjusts slowly to an unexpected news, and (2) there are probably discrepancies between market value and intrinsic value. Therefore, only in an inefficient market could the difference between market and intrinsic values increase after the announcement of an unexpected positive news.

Market Efficiency

• contrast market value and intrinsic value