"Equity Investments": Market Efficiency

C is correct. A corporate manager pursuing a cost leadership strategy must be able to invest in productivity-improving capital equipment for achieving cost controls and being able to offer products and services at lower prices than the competition.

A is incorrect. Offering products that are unique either in quality, type, or means of distribution is suitable for differentiation strategies.

 B is incorrect. Having strong market research teams for product development and marketing is suitable for differentiation strategies.

A is correct. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. Therefore, after the announcement, the difference between a stock’s market value and its intrinsic value will remain equal to zero because both market and intrinsic values adjust to reflect the unexpected news by the same amount and at the same time. 

B is incorrect. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. In an inefficient market, (1) the market value of a stock adjusts slowly to an unexpected news, and (2) there are probably discrepancies between market value and intrinsic value. Therefore, only in an inefficient market could the difference between market and intrinsic values decrease after the announcement of an unexpected positive news.

 C is incorrect. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. In an inefficient market, (1) the market value of a stock adjusts slowly to an unexpected news, and (2) there are probably discrepancies between market value and intrinsic value. Therefore, only in an inefficient market could the difference between market and intrinsic values increase after the announcement of an unexpected positive news.