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

Which of the following is a logical consequence of the semi-strong form of the EMH?

Semi-strong efficiency contains weak form efficiency, since past prices are public information. So neither technical analysis nor fundamental analysis of public data can consistently beat the market, although insiders with private information might still profit, which only the strong form rules out.

  1. ATechnical analysis is useless, since weak form efficiency follows from semi-strong efficiency, and fundamental analysis of public data cannot earn consistent excess returnsCorrect
  2. BInsider trading cannot be profitable
  3. CPrices never deviate from fundamental value at any moment
  4. DOnly passive index funds can have positive returns
  5. Past returns can be used to forecast future returns reliably

Explanation

Public information includes past prices, so semi-strong efficiency implies the weak form. Both technical and public fundamental analysis then fail to give consistent excess returns. Insider profits remain possible because private information is not covered by the semi-strong form.

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