Explanation:
Based on the provided description of the graph, the stock price adjusts gradually (a curve rising and leveling off) to the availability of public information rather than adjusting instantaneously. In a semi-strong form efficient market, stock prices would immediately reflect all publicly available information, causing a sudden vertical jump in price. Because the price adjustment in Country A's market takes time, the market is not semi-strong form efficient. This inefficiency implies that an active portfolio manager could potentially analyze the public information and trade on it to earn a return in excess of the market return before the price fully adjusts. Therefore, active management may indeed result in excess returns.
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Q.2384 Country A has a well-developed financial market. Information is freely available and is accessible by each market participant. A company involved in oil exploration recently discovered huge oil reserves. The stock price of the company after the disclosure of the information is presented below.
![Graph showing Price (P) on y-axis and Time (t) on x-axis, with a curve rising and leveling off, labeled "Public Information" with an arrow pointing to the curve.]
An investment management firm situated in country A promises a return in excess of the market return. Select the most appropriate statement:
A
Returns will not exceed the market return.
B
Active management may indeed result in excess return.
C
Passive management may indeed result in excess return.
D
None of the above.
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