Question

2. If the public expects a corporation to lose $5 a share this quarter and it actually loses $4, which is still the largest loss in the history of the company, what does the efficient market hypothesis say will happen to the price of the stock when the $4 loss is announced?

Answer 1

According to the efficient market hypothesis, the stock price of the corporation is likely to increase when it announces a loss of $4 per share, as it performed better than the public expectation of a $5 loss per share.

Step-by-step explanation:

The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information, including public expectations. If a company performs better than the public expectations, even if the result is still negative, the stock price is likely to rise. In the scenario described, the public expected the corporation to lose $5 per share, but it reported a loss of $4 per share. According to the EMH, the stock price should increase because the actual loss was less than expected, which is new information that the market will quickly assimilate. This potential increase is grounded in the idea that the market had already priced the stock expecting a $5 loss; a smaller loss of $4 comes as positive news relative to expectations.

Answer 2

Price of the stock will rise or increase

Step-by-step explanation:

Efficient market hypothesis states that price of stock factors in all information related to the stock. As such, nobody can take advantage of higher returns offered by a particular stock for a long time.

In line with efficient market efficiency, if public expected a bigger loss of $5 but loss was only for $4, the price of stock will increase. Though the company still suffers a loss, it is less than what was expected by the market, resulting in increase in stock price.