CS Executive · Corporate Accounting and Financial Management · Security Analysis
A researcher finds that an investor who studies past price charts and trading volumes of listed shares cannot earn returns higher than the market on a risk-adjusted basis, but investors with access to unpublished company information still can. Which form of the Efficient Market Hypothesis is consistent with this finding?
The finding fits the weak form of the Efficient Market Hypothesis. Under it, prices already reflect all past price and volume data, so chart-based analysis gives no abnormal returns, while private information can still be profitable because the market is not strong-form efficient.
- AWeak formCorrect
- BSemi-strong form
- CStrong form
- DNo form of efficiency
Explanation
Weak form efficiency says current prices fully reflect all past price and volume data, so technical analysis cannot give abnormal returns. Since insiders with private information still gain, prices do not reflect all information, which rules out the strong form. Semi-strong would require that public information, such as published financials, is also fully reflected, which is not what is stated.
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