D** Contrast the weak-form, semi-strong-form, and strong-form market efficiency.

Question 1

Weak Form

Answer 1

The weak form of the efficient markets hypothesis (EMH) states that security prices fully reflect all past price and volume information.
• Weak-form: Only Information about an
assets’ own price history.

The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.

The weak form relates to historical information only. The strong form relates to public and private information.

Question 2

Semi Strong Form

Answer 2

The semi-strong form of the EMH states that security prices fully reflect all publicly available information.
• Semi-strong form: All publicly
available information.
– Own price and volume history, other price
and volume histories, and all publicly
available news

The semi-strong form of efficient market hypothesis (EMH) asserts that:all public information is already reflected in security prices.
Semi-strong EMH states that publicly available information cannot be used to consistently beat the market performance.
The semi-strong form of the EMH asserts that security prices fully reflect all publicly available information. This would include all historical information.

Question 3

Strong Form

Answer 3

The strong form of the EMH states that security prices fully reflect all public and private information.
• Strong-form: All information, public
and private.
Strong-form.

According to the strong-form EMH, security prices reflect all information, which includes the privately available (monopolistic) information.

Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information? Strong-Form: The strong-form EMH assumes that stock prices fully reflect all information from public and private sources. In addition, no group of investors has monopolistic access to information relevant to the formation of prices.

The other statements are true. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets – information is free and available to all.

The strong-form efficient market hypothesis (EMH) asserts that stock prices fully reflect which of the following types of information? The strong-form EMH assumes that stock prices fully reflect all information from public and private sources.

The statement, “Stock prices fully reflect all information from public and private sources,” can be attributed to which form of the efficient market hypothesis (EMH)?
This is the definition of the strong-form EMH. Private sources include insider information, such as persons holding monopolistic access to information relevant to the formation of prices.

Question 4

Differences General

Answer 4

The differences depend on the
information available to the speculator.
• The question is, with the available
information, can a speculator obtain
abnormal profits.
– Equivalent to asking whether future prices
can be forecast.

Question 5

EMH, The set of assumption that imply ‘efficient capital markets’

Answer 5

The set of assumptions that imply an efficient capital market includes:

There exists a large number of profit-maximizing market participants.
New information occurs randomly.
Market participants adjust their price expectations rapidly (but not necessarily correctly).
Return expectations implicitly include risk.