CA Final · Advanced Financial Management · Security Analysis
Shares of Kaveri Pharma Ltd. trade at ₹500 in a market believed to be semi-strong form efficient. The company publicly announces a surprise approval for a drug, and investors estimate the fair value should rise to ₹560. An investor, Mr. Iyer, reads the announcement an hour after it is released and buys. Which outcome is most consistent with semi-strong efficiency?
The price will already have adjusted to about ₹560, so Mr. Iyer earns no abnormal return. Under semi-strong efficiency, prices incorporate new public information almost instantly and fully, so trading after a public announcement cannot beat the market after adjusting for risk.
- AThe price will have already adjusted to about ₹560 by the time Mr. Iyer buys, so he earns no abnormal returnCorrect
- BThe price will move to ₹560 gradually over several weeks, giving Mr. Iyer an abnormal gain
- CThe price will fall below ₹500 because public news is already discounted
- DThe price will adjust only after insiders trade on the information
Explanation
In a semi-strong efficient market, prices adjust rapidly and fully to new public information. Hence by one hour later the price should be near ₹560 and a trade based on the public announcement yields no abnormal return. A gradual drift would contradict semi-strong efficiency.
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