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LOS a, (Part 2): Describe and contrast the three forms of the efficient market hypothesis (EMH).fficeffice" />

Q1. The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)?

A)   Semistrong-form EMH.

B)   Strong-form EMH.

C)   Weak-form EMH.

Correct answer is B)

This is the definition of the strong-form EMH. Private sources include insider information, such as persons holding monopolistic access to information relevant to the formation of prices.

 

Q2. The strong-form efficient market hypothesis (EMH) asserts that stock prices fully reflect which of the following types of information?

A)     Public, private, and future.

B)   Public and private.

C)   Market.

Correct answer is B)

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

 

Q3. The semi-strong form of efficient market hypothesis (EMH) asserts that:

A)   both public and private information is already incorporated into security prices.

B)   past and future prices exhibit little or no relationship to another.

C)   all public information is already reflected in security prices.

Correct answer is C)

Semi-strong EMH states that publicly available information cannot be used to consistently beat the market performance.

 

Q4. Which of the following statements is INCORRECT?

A)   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.

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

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

Correct answer is A)

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.