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IAI Actuarial Core Principles · Economic Modelling · Rational expectations theory and the efficient markets hypothesis

Under the weak form of the Efficient Markets Hypothesis, which of the following statements is correct?

Weak-form efficiency means current prices already reflect all past price and volume data, so technical analysis based on historical patterns cannot consistently earn excess returns. Public-information and insider-information claims belong to the semi-strong and strong forms respectively.

  1. ACurrent prices fully reflect all past price and trading volume information, so technical analysis cannot earn consistent excess returnsCorrect
  2. BCurrent prices reflect all publicly available information, so fundamental analysis cannot earn excess returns
  3. CCurrent prices reflect all public and private information, so even insiders cannot earn excess returns
  4. DFuture prices can be predicted exactly from past price patterns
  5. Prices change only when dividends are announced

Explanation

The weak form states that past prices and volumes are already impounded in current prices. Hence charting and other technical analysis cannot generate consistent abnormal returns. Option 1 describes the semi-strong form and option 2 the strong form.

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