Aerotech, an aerospace technology research firm, announced this morning that it hired the world's most knowledgeable and prolific space researchers. Before today, Aerotech's stock had been selling for $100. Assume that no other information is received over the next week and the stock market as a whole does not move.
a. What do you expect will happen to Aerotech's stock?
b. Consider the following scenarios:
i. The stock price jumps to $118 on the day of the announcement. In subsequent days it floats up to $123, then falls back to $116.
ii. The stock price jumps to $116 and remains at that level.
iii. The stock price gradually climbs to $116 over the next week.
Which scenario(s) indicate market efficiency? Which do not? Why?