Asked by Manal Al-Hashmi on Jun 09, 2024
Verified
Most studies of stock market efficiency suggest that the stock market is highly efficient in the weak form and reasonably efficient in the semistrong form.Based on these findings,which of the following statements is correct?
A) Information disclosed in companies' most recent annual reports can be used to consistently beat the market.
B) The stock price for a company has been increasing for the past 6 months. Based on this information, it must be true that the stock price will also increase during the current month.
C) Information you read in a daily newspaper such as National Post today cannot be used to select stocks that will consistently beat the market.
D) Managers who have inside information that is not available to the public cannot consistently earn abnormal returns, i.e., returns that are higher than those predicted by the SML.
Weak Form
Assumes that all information contained in past price movements is fully reflected in current market prices. Thus, information about recent trends in a stock’s price is of no use in selecting a stock.
Semistrong Form
States that current market prices reflect all publicly available information. Therefore, the only way to gain abnormal returns on a stock is to possess inside information about the company’s stock.
Stock Market Efficiency
The concept that all available information is reflected in stock prices, thus making it impossible to consistently achieve higher returns than the overall market.
- Recognize the different forms of market efficiency and their impact on investment strategies.
Verified Answer
CG
Charles GipsonJun 13, 2024
Final Answer :
C
Explanation :
The efficient market hypothesis suggests that all publicly available information is already reflected in stock prices. Therefore, any information that is already known by the public, such as information reported in a daily newspaper, cannot be used to consistently beat the market. Choice A is incorrect because if information from annual reports is already reflected in stock prices, it cannot be used to consistently beat the market. Choice B is incorrect because past performance is not a reliable indicator of future performance. Choice D is incorrect because insider trading is illegal and unethical, and studies have shown that when insiders trade on privileged information, they can earn abnormal returns.
Learning Objectives
- Recognize the different forms of market efficiency and their impact on investment strategies.