ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares
Which of the following is evidence AGAINST the semi-strong form of the efficient market hypothesis?
The size anomaly is evidence against semi-strong efficiency. Small company shares earning returns above those justified by risk means investors can profit using publicly known information, so prices do not fully reflect it. The other options, random walks, poor fund performance and instant reactions, support market efficiency.
- AShare prices follow a random walk with no predictable pattern from past prices
- BFund managers as a group fail to beat the market index after deducting costs
- CSmall company shares have historically produced returns above those predicted by their risk, an effect known as the size anomalyCorrect
- DShare prices react immediately to the announcement of a rights issue
Explanation
A persistent abnormal return available from public information, such as company size, indicates prices do not fully reflect public information, contradicting semi-strong efficiency. Random walk behaviour supports weak form. Fund managers failing to beat the index and immediate reactions to announcements support efficiency.
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