CMA Final · Strategic Financial Management · Efficient Market Hypothesis
A share is expected to pay no dividend and its price follows a random walk with drift. Today's price is ₹200. Under the weak form of EMH, if the expected annual return required by investors is 12% and the price is a martingale after adjusting for required return, what is the best estimate of the price one year from today?
With no dividend, investors must be compensated through price appreciation, so the best estimate of next year's price is today's price grown at the required return. That is 200 multiplied by 1.12, which equals ₹224.
- A₹224Correct
- B₹200
- C₹212
- D₹188
Explanation
With no dividend, expected price = 200 × 1.12 = ₹224 because the price must grow at the required return. Option B ignores the drift and treats price as pure martingale. Option C adds 12 instead of 12% of 200 and is wrong; option D subtracts.
Did you get it right without looking?
One question tells you little. A timed set on Efficient Market Hypothesis shows your real accuracy, how long you take and where you lose marks.
More Efficient Market Hypothesis questions
- Under the semi-strong form of the Efficient Market Hypothesis, a company announces an unexpectedly high dividend increase. Which price behav…
- A mutual fund manager claims skill. Over a period the fund earned 17%, with Rf 7%, market return 14% and fund beta 1.3. A market-efficiency …
- In an event study of a bonus announcement by Sunrise Textiles, the actual returns and the market-model expected returns over a three-day win…
- Studies of mutual fund performance in a market find that fund managers who analyse only published balance sheets, ratio trends and past pric…
- An analyst studies 200 listed Indian companies and finds that after quarterly results are announced, share prices adjust fully within minute…
- Shares of Kaveri Motors were expected to give a return of 12% for a day, based on the market model. On the day of a bonus announcement, the …