Skip to content

IAI Actuarial Core Principles · Business Finance · Key principles of finance

An investor claims that, because a market is strong-form efficient, which of the following must be true?

In a strong-form efficient market, prices reflect all information, public and private, so even investors with inside information cannot earn consistent abnormal returns. Prices still move as new information arrives, and the hypothesis says nothing about the legality of insider trading.

  1. AOnly investors with public information can earn abnormal returns
  2. BEven those with inside, non-public information cannot earn consistent abnormal returnsCorrect
  3. CTechnical analysis works but fundamental analysis does not
  4. DShare prices never change
  5. Insider trading is always legal

Explanation

Strong form says prices reflect all information, public and private, so nobody, including insiders, can earn consistent abnormal returns. Technical analysis fails under weak form already. Prices still change as new information arrives, and legality of insider trading is unrelated to the hypothesis.

Did you get it right without looking?

One question tells you little. A timed set on Key principles of finance shows your real accuracy, how long you take and where you lose marks.

Practise Key principles of financeFree diagnostic mock

More Key principles of finance questions