Practice Question
Which of the following is not correct regarding market efficiency?
A) Weak form efficient states that prices reflect all market data (past prices and volumes)
B) Semi-strong form efficient includes all publicly known information as available in financial statements
C) Strong form efficient says that prices reflect all information both public and private information
D) If the market is strong form efficient, insiders can consistently earn abnormal profits because they have access to private information
Answer +
Final Answer: D) If the market is strong form efficient, insiders can consistently earn abnormal profits because they have access to private information.
Explanation +
Explanation:
- A) True. Weak form efficiency reflects all past market data, like prices and volumes.
- B) True. Semi-strong form efficiency incorporates all publicly available information.
- C) True. Strong form efficiency assumes all information, public and private, is reflected in prices.
- D) False. In a strong form efficient market, no one — not even insiders — can consistently earn abnormal profits because all information is already priced in.
Conclusion: Statement D is incorrect, making it the correct answer to this question.