Practice Question
In the weak form of market efficiency is respected, then we can argue that:
A) Stock prices reflect insider trading
B) Fundamental analysis isn’t helpful
C) Trends in stock prices would be useful in selecting stocks
D) Insider information is the only tool that can help generate abnormal returns
E) Stock price changes follow a random walk
Under weak form market efficiency, all past trading information—such as stock prices and volume—is already incorporated into current stock prices.
As a result, technical analysis is ineffective, and since prices already reflect historical information, fundamental analysis also provides no advantage in generating abnormal returns.
- Option A is incorrect: Insider trading relates to strong form efficiency.
- Option C is incorrect: Price trends are past data, already reflected in the stock price.
- Option D is incorrect: Insider information is outside the scope of weak form efficiency.
- Option E is close but not the best answer—price changes do follow a random walk in weak form, but the question asks what we can "argue", and B better reflects the implication.
Therefore, the best answer is: B) Fundamental analysis isn’t helpful.