Struggling with Efficient Market Hypothesis, hardly to understand the weak/semistrong/strong form differences. here are 2 questions from old posts, ------------------------------------------------------------------------------ 1.In an efficient capital market, which of the following statements is most accurate? a. All capital assets will be priced to produce the same return. b. All investors will earn the same return in the long run. c. The expected net present value of all possible investments within the market will be zero. d. The expected returns of NYSE specialists should be no different from those of other investors. ------------------------------------------------------------------------------ 2.Which of the following can be used to support the strong form of the efficient market hypothesis (EMH)? a. Event studies. b. Cross-sectional studies. c. Dividend yield studies. d. Studies of SEC insider trading data. can anyone give some analysis? thanks in advance. original post link: http://www.analystforum.com/phorums/read.php?11,629336,629499#msg-629499
- D - Specialist would have no advantage over me when both of us trade stock. 2. I don’t know ©
I think 1. D Specialists will have the same returns as common investor. 2: d. Studies of SEC insider trading data. It would prove that insiders had the same returns as common investors.
annex, I think the correct answers are d for both questions. I find it helpful to remember that each stage of efficiency is progressively more inclusive. So you start out with weak-form EMH which asserts that all market data is already reflected in security prices. Note that if this were true, technical trading strategies should offer no advantage (as they’re reliant on market data). But fundamental analysis may offer some advantage because it uses company filings rather than just market data. Then we’ve got semi-strong form EMH which asserts that all public information is already reflected in security prices (both market data and filings are public). So if this were true, neither technical- nor fundamental analysis should offer investors any advantage. Finally there’s strong-form EMH which asserts that all information, both public and private, is currently reflected in security prices. So if this were true, specialists, corporate insiders and others with access to material nonpublic information shouldn’t have any advantage over the rest of us. Anyway, just a few observations. So but you’ll have to learn this just like everything else: with time, persistence and practice.
Answer from original post 1. C 2. A
hiredguns1, your words let me understand better.
hiredguns1, not sure about this part though: > But fundamental analysis may offer some advantage because it uses company filings rather > than just market data. I don’t think anything in the hypothesis suggests that, agreed?
Dreary, Weak-form EMH is among the challenges to the assumptions underlying technical analysis. I’m referring now to p.617 of my 2006 LI CFAI curriculum, Volume III, which I suspect you don’t have but nonetheless should be able to find a similar discussion in whatever LI material you own. My point is that if we assume that Weak-form EMH holds, this doesn’t require us to rule out fundamental analysis as a tool that can offer advantages for security selection. The logic here is intuitive: Weak-form EMH only asserts that all market data is already reflected in security prices. Okay, fine, but fundamental analysis uses financial statements, among other public information sources to reach conclusions. Only the acceptance of Semi-strong form EMH (or strong form, which is inclusive of semi-strong form) will cause fundamental analysis to not offer any advantage at security selection. This is because Semi-strong form EMH contends that all public data are already reflected in security prices and fundamental analysis is reliant upon public information… Anyway, if you can cite any credible sources to refute my observation, I’m all ears.
I dont know what #1 is. I would guess D because an efficient capital market means every investment is fairly valued so a NYSE broker would have no advantage over an individual investor. #2 is D because strong-form EMH includes insider information.