Practice Question
Which of the following statements is most correct?
A. If a market is strong-form efficient this implies that the returns on bonds and stocks should be identical.
B. If a market is weak-form efficient this implies that all public information is rapidly incorporated into market prices.
C. If your uncle earns a return higher than the overall stock market, this means the stock market is inefficient.
D. Statements a and b are correct.
E. None of the above statements is correct.
Answer +
Final Answer: E) None of the above statements is correct.
Explanation +
Explanation:
- A) Incorrect. Strong-form efficiency means all information (public and private) is reflected in prices, but it doesn't imply identical returns for bonds and stocks, which have different risk-return profiles.
- B) Incorrect. Weak-form efficiency only assumes that all **past** trading data is reflected in prices, not all public information — that’s semi-strong form.
- C) Incorrect. Outperforming the market does not necessarily imply inefficiency — it may be due to risk, luck, or skill.
- D) Incorrect. Both A and B are false, so D is false too.
- E) Correct. None of the statements A to D are accurate descriptions of market efficiency.
Conclusion: Option E is the correct answer since none of the statements A–D accurately reflect the Efficient Market Hypothesis.