Question

If it proves possible to make abnormal profits based on information regarding past stock prices, then the market:

Select one:

a. is weak-form efficient.

b. is not weak-form efficient.

c. is semi-strong-form efficient.

d. is strong-form efficient

Answer 1

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Efficient market hypothesis:

The security prices already reflect all the available information.

The efficient market hypothesis says that past price movement, earnings report and volume traded doesn't affect stocks Current price and can't be used to predict the stocks future directions.

In simple words, past performance doesn't guarantee the future performance of the stock price moment. The stock price follows Brownian motion. That is stock price moment is random that's why it's also called as random walk theory.

They are 3 levels of Market efficiency:

1. Strong efficiency: Insider information, fundamental analysis and technical analysis are unless in such a market.

2. Semi- Strong: fundamental analysis and technical analysis are unless in such a market.

3. Weak: technical analysis is unless in such a market or past price data is useless.

Thus in an efficient market: the market value would represent the true value of an asset.

In the given scenario the market is not efficient.

Answer: b. is not weak-form efficient.