Unexploited profit opportunity

Unexploited profit opportunity refers to a situation where an investor is able to earn a return higher than s/he can normally earn.

If low P/E securities are likely to have positive abnormal returns, it will indicate an unexploited profit opportunity giving evidence that investors are not utilizing all available information for making profitable investments.

If large fluctuations in a stock price can be predicted, then the stock return’s optimal forecast will not be equal to the equilibrium return for the mentioned stock. Here, there will exist unexploited profit opportunities in the market and expectations will be irrational. When very small fluctuations in stock prices can be predictable and the stock return’s optimal forecast will be equal to the equilibrium return, there an unexploited profit opportunity will not exist.

According to the efficient markets hypothesis, if unexploited profit opportunities arise in an efficient market, those will be eliminated quickly. If a security return’s optimal forecast exceeds the equilibrium return, the market is inefficient.

When unexploited profit opportunities arise on securities investors will hurry to purchase until the prices rise to the point where the returns are again normal.

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