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Question 10B

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Essentials Of Investments
Found in: Page 259
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

Which of the following sources of market inefficiency would be most easily exploited?

a. A stock price drops suddenly due to a large block sale by an institution.

b. A stock is overpriced because traders are restricted from short sales.

c. Stocks are overvalued because investors are exuberant over increased productivity in the economy.

The correct answer is ‘c’.

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Step by Step Solution

Definition

Market inefficiency refers to a condition where an asset’s price is not truly reflected with all the available information.

Explanation

In a weakly inefficient market, it is unlikely that there would be exuberant investors over increased economic productivity. On the contrary, this is a predictable pattern on returns. In the above scenario, the overvalued stocks without any regulatory mechanisms would provide investors to manipulate price and earn huge profits.

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