Question

17. an observation that stocks with above average pe ratios have consistently underperformed those with below average pe ratio least likely contradicts which form of the market efficiency? a. weak form b. strong form c. semi-strong form

Answer 1

The observation that stocks with above-average P/E ratios consistently underperform those with below-average P/E ratios least likely contradicts the weak form of market efficiency.

Step-by-step explanation:

Market efficiency refers to how quickly and accurately prices reflect all available information. The weak form assumes that past prices and data do not predict future prices, hence the observation of consistently underperforming stocks with higher P/E ratios aligns with this form. Stocks with higher P/E ratios often indicate higher growth expectations, but this information might already be factored into their prices, leading to underperformance.

The consistent trend of underperformance contradicts the idea that historical data (like P/E ratios) cannot predict future stock performance, supporting the weak form of market efficiency.

Considering semi-strong and strong forms: Semi-strong form includes public information, and if stocks with above-average P/E ratios consistently underperformed, it would suggest a contradiction since this information is considered public. Strong form efficiency implies all information, public and private, is reflected in prices. If above-average P/E stocks consistently underperformed, it would challenge the strong form as well, indicating private information might be influencing these stocks' performance.

Answer 2

The observation that stocks with above-average Price-to-Earnings (P/E) ratios consistently underperform those with below-average P/E ratios is least likely to contradict the weak form of market efficiency. The correct answer is a.

Step-by-step explanation:

The weak form of market efficiency posits that historical price data, including past stock prices and trading volumes, are already reflected in current stock prices. Therefore, it allows for the possibility of exploiting market inefficiencies based on historical data like P/E ratios.

This observation would contradict the semi-strong form of market efficiency or the strong form, both of which propose that all publicly available information (semi-strong) or even all information including insider information (strong) is already incorporated into stock prices.

If stocks with certain P/E ratios consistently outperform or underperform, it suggests that this information isn't fully reflected in stock prices, contradicting semi-strong or strong forms of market efficiency. Therefore, the correct answer is a.