Why would strong form efficiency be violated if we trade based on public information?

Hi guys,
I just don’t get this answer… There isn’t any mention of the analyst trading on any private infomation, he is only using P/E and public earning announcements, why would his model violate strong form efficiency hypothesis?

Greetings friend! If semi-strong is violated, then strong is also violated. Because strong includes all of the semi-strong elements “plus” any private or non-public information too.

It’s like ordering numbers. If X is less than 3, then by logic it must also be less than 4 too.

It’s an exam wording issue I guess. When they say “violated” in terms of market efficiency forms, they mean the hypothesis form is violated (shown not to be true). If the strong market efficiency form theory says the market incorporates all information… but there is an apparent glitch and someone is outperforming based on information, then the strong form is violated. Depending on what type of information is being used to exploit the market inefficiency, either or both of the weak or semi-strong forms might be violated too.

For the purposes of the CFA exam, “weak” form is typically violated in scenarios when technical analysis (using past price data) works and people make money from that. If weak form is violated, then by logic the more stringent semi-strong and strong forms are also violated. Because if you can make money based on analyzing past price data, the market can hardly be said to be impossible to exploit by any information, even with inside information as the strong form of market efficiency hypothesis would claim… or through using any past or current public information as semi-strong would claim. “Semi-strong” usually refers to fundamental analysis on CFA exams, using any form of public information not just past price data. “Strong” means using any public or private information. If a lower form is violated then the higher forms must be violated too, by default. Does this make sense?

Cheers, good luck, you got this👍

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Thanks a lot Greybeard. Came across another question like this one today and nailed it thanks to your explanation :).

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Cheers - you’re always asking great questions so you definitely got this :+1: