Strong Form Efficient Market Quiz

Semi-Strong Form Efficient Market

• Prices reflect all publicly known and available information, including financial statement data and financial market data.
• Analyzing earnings announcements to identify underpriced or overpriced securities is pointless because prices already reflect all publicly available information.
• Investors who base their decisions on new public information should not derive above-average risk-adjusted return from their transactions, considering the cost of trading.
• If a market is semi-strong efficient, it must also be weak-form efficient.

Research on Semi-Strong Form Efficient Market

• Researchers have examined various company-specific information events, such as stock splits, dividend changes, and merger announcements.
• They have also examined economy-wide events, such as regulation changes and tax rate changes.
• Results of most research are consistent with the view that developed securities markets might be semi-strong efficient.
• However, some evidence suggests that markets in developing countries may not be semi-strong efficient.

Strong Form Efficient Market

• Security prices fully reflect both public and private information.
• Insiders would not be able to earn above-average returns from trading on the basis of private information.
• A strong-form efficient market prices reflect all private information, including everything that the management of a company knows about its financial condition.
• A market that is strong-form efficient is, by definition, also semi-strong and weak-form efficient.

Tests of Strong Form Efficient Market

• Tests have analyzed returns over time for different identifiable investment groups to determine whether any group consistently received above-average risk-adjusted returns.
• Such a group must have access to and act upon important private information or an ability to act on public information before other investors.

Corporate Insiders and Financial Analysts/Money Managers

• Corporate insiders have enjoyed above-average returns by selling prior to low returns or buying before strong returns, implying that they had private information.
• Financial Analysts and Money Managers have the ability to select/recommend undervalued stocks, which might lead to gain an above-average return for those who follow these recommendations.

Fundamental Analysis

• Fundamental Analysis is the examination of publicly available information, including company data, industry and economic data.
• Fundamental analysis is necessary in a well-functioning market because it facilitates a semi-strong efficient market by disseminating value-relevant information.

Test your knowledge of strong-form efficient markets, including tests and analysis of returns for different investment groups. Learn about the characteristics of strong-form efficiency and how it relates to semi-strong and weak-form efficiency.