Skip to content

IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis

A pension fund trustee in Mumbai believes the Indian large-cap equity market is semi-strong form efficient. Which investment policy is most consistent with this belief?

A trustee who believes in semi-strong efficiency should hold a low-cost passive index portfolio, because prices already reflect all public information, so paying for analysis of published accounts or announcements is unlikely to add consistent excess returns.

  1. AHold a low-cost passive index portfolio and avoid paying for active stock selection based on published accountsCorrect
  2. BEmploy analysts to trade on newly published quarterly results to earn consistent excess returns
  3. CUse only insider information to time purchases of shares
  4. DRely on past price charts to identify repeating patterns that give excess returns
  5. Switch fund managers every quarter to chase the best recent performer

Explanation

Semi-strong efficiency means prices already reflect all public information, including published accounts and announcements. Analysis of public data cannot reliably earn excess returns after costs, so passive low-cost holding is consistent. Chart patterns would be tested under weak form, and insider information would only work if the strong form fails.

Did you get it right without looking?

One question tells you little. A timed set on Rational expectations theory and the efficient markets hypothesis shows your real accuracy, how long you take and where you lose marks.

Practise Rational expectations theory and the efficient markets hypothesisFree diagnostic mock

More Rational expectations theory and the efficient markets hypothesis questions