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

Studies show that investors cannot earn consistently abnormal returns by analysing past share price movements, but some investors do earn abnormal returns by using information from published financial statements. Which form of the efficient market hypothesis is most consistent with these findings?

The findings are consistent with weak form efficiency only. Past prices give no advantage, so the weak form holds, but published financial information still allows abnormal returns, which means prices do not fully reflect public information and semi-strong efficiency fails.

  1. AWeak form efficiency but not semi-strong form efficiencyCorrect
  2. BSemi-strong form efficiency but not strong form efficiency
  3. CStrong form efficiency
  4. DThe market is inefficient in all forms, including the weak form

Explanation

If technical analysis of past prices yields no abnormal returns, the market is at least weak form efficient. If published accounts allow abnormal returns, public information is not fully reflected in prices, so semi-strong efficiency does not hold. Option B is wrong because it requires public information to be fully reflected in prices.

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