Question

If the market is strong-form efficient, which of the following statements is false?

	a.	Smaller firms tend to outperform larger firms on a risk-adjusted basis.
	b.	Security prices reflect all publicly available information.
	c.	An average mutual fund does not outperform the market as a whole.
	d.	Prices will fluctuate randomly around their true value.
	e.	Both technical analysis and fundamental analysis are economically worthless.

Answer 1

Answer: (a) Smaller firms tend to outperform larger firms on a risk-adjusted basis.

Strong form efficiency is the most stringent version of the efficient market hypothesis (EMH) investment theory, stating that all information in a market, whether public or private, is accounted for in a stock's price.

Strong form Efficient Market theory assumes it would be impossible to outperform the market and that all investors interpret information the same way.

The Efficient Market Hypothesis assumes all stocks trade at their fair value. This degree of market efficiency implies that profits exceeding normal returns cannot be realized regardless of the amount of research or information investors have access to as the prices fluctuate randomly around the true value.

According to Burton G. Malkiel, the man behind strong form efficiency, described earnings estimates, technical analysis, and investment advisory services as “useless”, adding that the best way to maximize returns is by following a buy-and-hold strategy.