On the golf course, John was playing near a group of four golfers. One of the four
Question:
On the golf course, John was playing near a group of four golfers. One of the four golfers was a director of Company ABC. The director was telling the three other golfers in his group that his company made much higher profits in the past year than in the previous year. When John went back to the office after the golf game, he checked with his broker regarding the stock and found that, two weeks earlier, the company had made an announcement similar to what the director had told his friends. John went ahead to buy the stock and was very pleased that the stock earned him abnormal returns over the next month.
(i) Discuss the type of information that John heard on the golf course. Appraise which one (1) of the three forms of market efficiency is most relevant to this situation. (5 marks)
(ii) Analyse and discuss whether the above situation describes a violation of the efficient markets hypothesis. (5 marks)
(b) Briefly discuss two (2) risks that a bank faces when it takes in short term savings deposits and then lends the funds long term through commercial and housing loans. (6 marks)
(c) Distinguish between primary and secondary markets and describe the importance of the secondary market for an initial public offering of shares. (14 marks)
Accounting for Decision Making and Control
ISBN: 978-1259564550
9th edition
Authors: Jerold Zimmerman