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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 statements about the three forms of the efficient market hypothesis is correct?

Semi-strong efficiency implies weak form efficiency, because the forms are cumulative. Prices that reflect all public information necessarily reflect past price data too. The reverse does not hold, since weak form efficiency says nothing about other public information.

  1. AIf a market is semi-strong form efficient, it is also weak form efficientCorrect
  2. BIf a market is weak form efficient, it is also semi-strong form efficient
  3. CStrong form efficiency means prices reflect only past price data
  4. DSemi-strong form efficiency means prices reflect private information

Explanation

The forms are cumulative: semi-strong includes all public information, which includes past price history, so weak form is implied. The reverse is not true, so B is wrong. C and D confuse the information sets of the forms.

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