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

Which of the following market events is generally cited as evidence that share markets are NOT always efficient?

Speculative bubbles and crashes are evidence against market efficiency. When share prices move far from fundamental value, they are not fully reflecting available information rationally. Quick reactions to earnings news, tracker fund success and no profit from price trends all support efficiency.

  1. AShare prices adjusting quickly to unexpected earnings announcements
  2. BThe formation of speculative bubbles, such as share price boom and crash episodes, where prices departed greatly from fundamental valuesCorrect
  3. CIndex tracker funds matching the market return at low cost
  4. DThe absence of profitable trading rules based on past price trends

Explanation

Speculative bubbles and crashes suggest prices can move far from fundamental value, contrary to efficiency. The other three are findings consistent with an efficient market: quick adjustment, tracker success and no profit from past price patterns.

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