Assume that markets are semistrong efficient,but not strong-form efficient.Which of the following statements is correct?

A) Each common stock has an expected return equal to that of the overall market.
B) Investors may be able to earn returns above those predicted by the SML if they have access to information that has not been publicly revealed.
C) Investors can expect to earn returns above those predicted by the SML if they have access to public information.
D) Investors should expect to earn more than the returns that are predicted by the SML, because if they do not, they should not invest in the stock market.

Question

Fredrick Wallace · Accepted Answer

Final Answer : B, Explanation :  Semistrong efficiency means that all publicly available information is reflected in stock prices. However, if markets are not strong-form efficient, then investors may be able to earn returns above those predicted by the capital asset pricing model (SML) if they have access to private information that has not been publicly revealed. Therefore, B is the correct statement. Choices A, C, and D are incorrect because they assume that markets are strong-form efficient, which is not the case in this scenario.

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