Question

Your best friend is the CFO for a publicly traded corporation. He (illegally) tells you that the company had a surprisingly good quarter, and advises you to buy the stock before the earnings are reported next week. You purchase the stock, but to your surprise, the price does not increase in the days after the earnings announcement. This is an example of which form of market efficiency?

Group of answer choices

Technical Form

Semi-Strong Form

Strong Form

Answer 1

Answer - Strong form

There are 3 market efficiencies - weak form, semi-strong form, and strong form.

The weak form of market efficiency assumes that current stock prices fully reflect all historical information, including past returns. According to this form of market efficiency, technical analysts cannot make much money.

The semi-strong form of market efficiency assumes that the current stock price reflects all public information. Hence, only those with access to private information can make money.

The strong form of market efficiency assumes that the current stock price fully reflects all public and private information and hence, no Investors can benefit from technical analysis, fundamental analysis, or insider information.

In the above question, the earnings were a confidential issue and that did not impact the stock price after the announcement. This implies the private information was already reflective in the stock price.