Skip to content

CS Executive · Corporate Accounting and Financial Management · Security Analysis

A share of Kaveri Ltd. is expected to return 12% under CAPM. During a year, it actually returned 15%, and the market is assumed efficient. A day after earnings, the company unexpectedly announces results that make the price jump 4% beyond the expected return of that day. What does the EMH imply about the price movement after that day?

The abnormal gain is incorporated immediately, and no predictable further abnormal return follows. Under EMH, prices adjust quickly and unbiasedly to new information, so there is no continuing drift or reversal that investors could exploit to earn extra returns.

  1. AThe 4% abnormal gain will continue over the following days
  2. BThe price will reverse the 4% gain the next day
  3. CThe abnormal gain is immediately incorporated, with no predictable further abnormal returnCorrect
  4. DPrices will keep rising until the next announcement

Explanation

In an efficient market, new information is absorbed quickly and without bias, so the adjustment happens at once. Afterwards, future returns are not predictably abnormal. A continuing drift or a reversal would imply a pattern traders could exploit, contradicting efficiency.

Did you get it right without looking?

One question tells you little. A timed set on Security Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Security AnalysisFree diagnostic mock

More Security Analysis questions