Question

Which of the following observations would provide evidence against the strong form of efficient market theory? (a) Mutual fund managers do not on average make superior returns. (b) In any given year, approximately 50 percent of all pension funds outperform the market and 50 percent of all pension funds underperform the market. (c) Managers who trade in their own firm's stocks make superior returns. (d) Mutual fund managers do not on average make superior returns and, In any year, approximately 50 percent of all pension funds outperform the market.

Answer 1

Strong Efficient market theory reflects that passive form of investment must be always preferred and any stock market investor would not be able to outperform the index because the stocks already reflect each kind of public and privately available information.

Manager who trade in their own firm stock Even cannot make superior return because public informations as well as private informations are already discounted into the price. It is direct contradiction to strong form of market efficiency when managers are able to make money in their own stocks.

Rest of the two statements also contradict but to a certain extent because only 50% can outperform the market rest of the 50% couldn't outperform the market.

So if I had to choose only one option, I will be choosing option (C) because that is in complete contradiction of strong form of market efficiency

So the correct answer would be option (C).