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ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares

An analyst studies a share market and finds that investors cannot earn abnormal returns by analysing past share price patterns, but some investors do earn abnormal returns using detailed analysis of published financial statements. Which form of market efficiency is most consistent with this finding?

The market is weak form efficient only. Studying past prices gives no abnormal returns, which supports weak form efficiency, but investors profit from analysing published accounts, so public information is not fully reflected in prices and the market is not semi-strong efficient.

  1. AWeak form efficient onlyCorrect
  2. BSemi-strong form efficient
  3. CStrong form efficient
  4. DNot efficient in any form

Explanation

Past price analysis (technical analysis) yields no abnormal return, so the market is at least weak form efficient. Abnormal returns from public financial statements show that public information is not fully reflected in prices, so it is not semi-strong efficient. Therefore it is weak form efficient only.

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