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Which of the following is true about the Efficient Market Hypothesis, EMH? Question 5 options: There...

Which of the following is true about the Efficient Market Hypothesis, EMH?

Question 5 options:

There is ample evidence to confirm the strong-form EMH.

The semi-strong form EMH contains the weak-form EMH.

It is well-established (in academic research) that you can generate additional returns using price and volume pattern data.

Inside information is reflected in prices under the semi-strong form EMH.

Solutions

Expert Solution

Which of the following is true about the Efficient Market Hypothesis, EMH

correct answer : The semi-strong form EMH contains the weak-form EMH.

what the theory says

There are 3 forms of market efficiency under efficient market hypothesis:

  • Weak form of efficiency;
  • Semi- strong form of efficiency;
  • Strong form of the efficiency.
  • The weak form of efficiency stock : Here, prices are assumed to reflect any information that may be contained in the past history of the stock prices. So, in weak form of efficiency, no one investor or group of investors should be able to earn abnormal returns by using information about historical prices available for them and by using technical analysis.
  • The semi-strong form of efficiency : Here, all publicly available information is reflected in stocks’ prices. This information includes information in the stock price series as well as information in the firm’s financial reports, the reports of competing firms, announced information relating to the state of the economy and any other publicly available information, relevant to the valuation of the firm. One more thing is that, the market with a semi strong form of efficiency encompasses the weak form of the hypothesis because the historical market data are part of the larger set of all publicly available information. So no one investor or group of investors should be able to earn abnormal returns by using information about historical prices and publicly available fundamental information and fundamental analysis.
  • The strong form of efficiency : This is the stage which asserts that stock prices fully reflect all information, including private or inside information, as well as that which is publicly available. This form takes the notion of market efficiency to the ultimate extreme.
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