Question

• Which of the following describes a violation of the semi-strong form of the efficient market hypothesis (EMH)?
  • A) A classmate of yours excels in analyzing the future outlook of firms, but he does not find that his skill gives him any advantage in the marketplace. 

  • B) Very risky stocks on average yield higher returns than safe stocks. 

  • C) The stock of an acquired firm tends to provide a positive abnormal return to its 
shareholders when the merger announcement is made. 

  • D) Stocks usually perform better when there are more inside buyers than insider sellers. 
Examples of insiders are managers, executives, and directors. 


Answer 1

In semi strong from of market efficiency, investors can only earn an abnormal return using the inside information.

In option D, the stocks is performing better using inside information, so it is not a violation of the semi - strong.

In semi strong form of market efficiency all public information regarding a stock is completely reflected on the stock prices. So, no investor can earn abnormal returns based on any market information that is already available to the public.

So, option C, is a violation of the semi-strong form of market efficiency.

Any skills relating to fundamental or technical analysis cannot help an investor earn abnormal returns in a semi strong form of efficient markets.

So, option 1 does not hold any violation.

Only those  stocks can provide an abnormal return which are highly risky/speculative in nature. High risks stocks can provide a higher return in comparison to the low risk stocks.So, option 2 is also not in violation.

So, the correct option is option C.