Chapter 9 • The secondary capital market and its efficiency
9.1 What are the two roles of members of the LSE in respect of their secondary market
activities?
9.2 When UK shareholders have shares that they wish to sell, must the sale be made
through the LSE?
9.3 What is ‘price efficiency’ in the context of stock markets?
9.4 Is a market that is ‘strong-form efficient’ necessarily ‘semi-strong-form efficient’?
9.5 Without any knowledge of the evidence surrounding the efficiency of the LSE, would
you expect it to be efficient? Explain your response.
9.6 Must all of the world’s stock markets be price efficient? Explain your response.Review questions
Suggested answers to
review questions appear
in Appendix 3.(Problems 9.1 to 9.6 are all basic-level problems.)9.1*‘The shares of XYZ plc are underpriced at the moment.’
How logical is this statement about some shares quoted on the LSE?9.2*‘Capital market efficiency in the semi-strong form implies that all investors have all of
the knowledge that is publicly available and which bears on the value of all securities
traded in the market.’
Comment on this statement.9.3*‘In view of the fact that the market is efficient in the semi-strong form, there is no value
to investors in businesses publishing financial reports, because the information con-
tained in those reports is already impounded in share prices before that information is
published.’
Comment on this statement.9.4 ‘A graph of the daily price of a share looks similar to that which would be obtained by
plotting a series of cumulative random numbers. This shows clearly that share prices
move randomly at the whim of investors, indicating that the market is not price efficient.’
Comment on this statement.9.5 ‘A particular professionally managed UK equity investment fund produced better
returns last year than any of its rivals. This means that it is likely to outperform its rivals
again this year.’
Comment on this statement.9.6 ‘An efficient capital market is one in which the market portfolio contains no systematic risk.’
Is this statement correct? Explain.Problems
Sample answers to
problems marked with
an asterisk appear in
Appendix 4.