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

A study of Indian mutual fund managers finds that, after costs and risk adjustment, the average fund earns no abnormal return, but a small group of fund managers with access to unpublished company information earn significant abnormal returns. Which conclusion best fits the Efficient Markets Hypothesis?

Semi-strong holds while strong form is violated. Ordinary managers using public information earn nothing abnormal, matching semi-strong efficiency, but abnormal gains from unpublished information show prices do not reflect all private information, contradicting the strong form.

  1. ASemi-strong form holds and strong form is violatedCorrect
  2. BSemi-strong form is violated and weak form holds
  3. CStrong form holds but semi-strong form is violated
  4. DWeak form is violated and strong form holds
  5. All three forms are violated because some managers outperform

Explanation

Average managers using public information earn no abnormal return, which is consistent with semi-strong efficiency. The few managers earning abnormal returns do so using unpublished (private) information, which contradicts the strong form because prices do not reflect all private information. Nothing here shows a violation of weak or semi-strong forms, so the claim that all three fail is unsupported.

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