Question

Describe the events that occur in an efficient market in response to new information that causes the expected return to exceed the required return. What happens to the market value

Answer 1

The efficient market hypothesis tells, in an equilibrium, the price of stocks or security is an unbiased estimate of the true values.

Step-by-step explanation:

• Thus, in the equilibrium, of security prices are neither an overvalued nor are undervalued. Suppose the investors learn new information about the company that suggests there stock is worth more than the current price.

• The security gets undervalued expected return exceeds the required return. Increased in demand for security from the investors with this new information will thus bid up the market value plus reduce its expected return until they are equal.