CMA Final · Strategic Financial Management · Efficient Market Hypothesis
Studies of mutual fund performance in a market find that fund managers who analyse only published balance sheets, ratio trends and past price charts fail to earn abnormal returns after costs, but a few corporate insiders with undisclosed merger news consistently earn abnormal returns. Which form of the Efficient Market Hypothesis is best supported by this evidence?
Semi-strong form holds but strong form does not. Analysis of public information such as financial statements and past prices yields no abnormal returns, so prices already reflect public data, while insiders profit from undisclosed information, showing private information is not yet reflected in prices.
- AWeak form only is valid and semi-strong form is invalid
- BSemi-strong form is valid but strong form is not validCorrect
- CStrong form is valid because insiders earn returns
- DThe market is completely inefficient in every form
Explanation
Public information (statements, ratios, past prices) gives no abnormal return, so prices reflect all public information, which is the semi-strong form. Insiders earning abnormal returns from private information shows the strong form fails. Hence semi-strong holds but strong does not.
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