Question

Green Vaccine, Inc. just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for Green Vaccine stock is efficient?

1) The price of Green Vaccine stock increases significantly.
2) The price of Green Vaccine stock decreases significantly.
3) The price of Green Vaccine stock remains unchanged.
4) The price of Green Vaccine stock fluctuates unpredictably.

Answer 1

The correct answer is 3) The price of Green Vaccine stock remains unchanged.

Step-by-step explanation:

The reaction that indicates the market for Green Vaccine stock is efficient is 3) The price of Green Vaccine stock remains unchanged. In an efficient market, all available information is already reflected in the stock price.

Therefore, the announcement of a major medical advancement, such as the elimination of all flu viruses, would already be incorporated into the stock price before the announcement is made. It means that the market participants had already anticipated this news and the price had already adjusted to reflect the expectation of this development.