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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

An analyst studies 200 listed Indian companies and finds that after quarterly results are announced, share prices adjust fully within minutes, and that investors cannot earn abnormal returns by trading on those announcements after they become public. Which form of the Efficient Market Hypothesis is this evidence directly consistent with at the minimum level?

The evidence matches the semi-strong form of EMH. Prices adjust quickly and fully to publicly announced information such as quarterly results, so no abnormal returns can be earned after the announcement. Weak form covers only historical prices, and strong form would also include insider information.

  1. AWeak form
  2. BSemi-strong formCorrect
  3. CStrong form
  4. DRandom walk with drift only

Explanation

Rapid and full adjustment to publicly announced information such as results indicates that all public information is already reflected in prices. This is the semi-strong form. Weak form concerns only past price and volume data, and strong form would need private information also to be reflected, which this evidence does not test.

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