Explanation:
The graph illustrates a gradual adjustment of the stock price following the release of public information, rather than an instantaneous jump to a new equilibrium. This delayed reaction indicates that the market is not semi-strong form efficient. In a market that is inefficient at the semi-strong level, active portfolio managers can exploit the slow incorporation of public information into stock prices to generate risk-adjusted excess returns (alpha). Therefore, active management may indeed result in excess return. Passive management, which simply aims to replicate market returns, would not specifically exploit this inefficiency.
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.
No comments yet.