CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

E-Z Chemicals has a current stock price of $60. The company announced a new product at 11:00 am Wednesday, which the market had no knowledge of prior to the announcement. If the NPV per share of the project is $1, and the market agrees with this, what will the price be at 11:15 am Wednesday, if this is an efficient market?

A. The price will be $60.
B. The price will be $61.
C. The price will be $59.
Correct Answer: B

User Contributed Comments 9

User Comment
smillis If this is a strong form, the price would be 60.
ConorOG I don't think strong form would make a difference once the information is released to the public.
godz if the market is efficient stock prices will adjust accordingly as soon as new information becomes available.
Mathieu If this is a strong form, the price would be 60$, because the 'private' information is already included in the 60$ under the strong form.
steved333 You never assume strong-form efficiency, but rather weak-form. Only public information is reflected in the market generally speaking. Otherwise, no release of information would ever have an impact, and we all know that that is not the case. Since NPV is positive, there will be a positive impact on the price proportionate to the magnitude of the NPV, which in this case is $1. 60+1=61
mordja No, the strong form assumption would merely mean that it was priced in earlier. Ie it was priced in before it became available to the public.

Strong form assumes that all private information is priced in. It does not make the new product worthless.
papajeff The key word is "unexpected".
johntan1979 Guys... no need to argue. Why do you think that after all these years, it remains a hypothesis? EMH is and always will be flawed from time to time, weak, semi-strong or strong form. Need proof? Warren Buffett.
jonan203 or the myriad of analysts who called the subprime kyle bass & peter schiff
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