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AIM 3: Define market efficiency, identify the three forms of market efficiency, and discuss the link between efficiency and the CAPM.

1、Which of the following statements is INCORRECT?

A) The strong-form EMH assumes cost free availability of all information, both public and private.

B) The weak-form EMH suggests that fundamental analysis will not provide excess returns while the semi-strong form suggests that technical analysis cannot achieve excess returns.

C) The semi-strong form EMH addresses market and non-market public information.

D) The weak-form EMH states that stock prices reflect historical public market information.

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The correct answer is B

The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns. The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.

The other choices are correct. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets – information is free and available to all.

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2、Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information?

A) Weak-form.

B) Semistrong-form.

C) Strong-form.

D) Both weak and semistrong form.

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The correct answer is C

The strong-form EMH assumes that stock prices fully reflect all information from public and private sources. In addition, no group of investors has monopolistic access to information relevant to the formation of prices.

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3、Which of the following is least likely an assumption behind the semistrong-form of the efficient market hypothesis (EMH)?

A) A large number of profit-maximizing participants.

B) The timing of news announcements are independent of each other.

C) Investors adjust their expectations rapidly when confronted with new information.

D) All information is cost-free and available to everyone at the same time.

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The correct answer is D

The strong-form EMH assumes all information, both public and private, is cost-free and available to all investors at the same time.

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4、The strong-form efficient market hypothesis (EMH) asserts that stock prices fully reflect which of the following types of information?

A) Market.

B) Public and private.

C) Market and public.

D) Public, private, and future.

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The correct answer is B

The strong-form EMH assumes that stock prices fully reflect all information from public and private sources.

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5、Which of the following statements on the forms of the efficient market hypothesis (EMH) is least accurate?

A) The semi-strong form EMH addresses market and non-market public information.

B) The strong-form EMH assumes perfect markets. 

C) The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns.

D) The weak-form EMH states that stock prices reflect current public market information and expectations.

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The correct answer is D

The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.

The other statements are true. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets – information is free and available to all.