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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Over a year, a mutual fund in India earned 14% against a benchmark return of 14% with identical risk, while an insider-trading investigation shows company directors earned consistent abnormal gains from undisclosed results. Which statement best fits these two observations?

The market fails strong form efficiency because insiders earn abnormal gains from private information, yet the fund only matching its benchmark is consistent with semi-strong efficiency. Professional managers using public information show no superior performance, so only the strong form is violated.

  1. AMarket fails strong form efficiency but professional managers show no superior performance, consistent with semi-strong efficiencyCorrect
  2. BMarket fails weak form efficiency and the fund beat the market
  3. CMarket is strong form efficient since directors earned gains
  4. DMarket is semi-strong inefficient because the fund matched its benchmark

Explanation

Insiders earning abnormal returns from private information contradicts strong form efficiency. A fund with public information only that merely matches its benchmark is consistent with semi-strong efficiency. Matching a benchmark is not evidence of inefficiency, and the fund did not beat the market.

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