PRIN.OF CORPORATE FINANCE
PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 13, Problem 1PS

Market efficiency True or false? The efficient-market hypothesis assumes that

  1. a. There are no taxes.
  2. b. There is perfect foresight.
  3. c. Successive price changes are independent.
  4. d. Investors are irrational.
  5. e. There are no transaction costs.
  6. f. Forecasts are unbiased.
Expert Solution & Answer
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Summary Introduction

To discuss: Whether the given statements are true or false.

Explanation of Solution

The false options are as follows:

The efficient market hypothesis realize that investors read financial statements and recognize the influence of taxes.

Hence, option (a) is false.

The principles of arbitrage says that there is no perfect foresight in efficient market hypothesis.

Hence, option (b) is false.

The investors are rational. Most of the investors are impacted by their perception towards risk and their trust about probabilities as found in behavioural finance studies. In the case of arbitrage profit opportunities are excluded.

Hence, option (d) is false.

There are transaction cost. Most of the time the transaction cost are high for an example, some trading expenses are very high and some trades are hard to implement.

Hence, option (e) is false.

The true options are as follows:

The successive price changes are consider as self-determining.

Hence, option (c) is true.

The projections are impartial in efficient market hypothesis.

Hence, option (f) is true.

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