Practice Question
You have observed that every time the Andrews Sisters Music Corp’s stock rises by 2% in a week, it drops by 3% the next week. This observation is consistent with:
A. Weak form inefficiency
B. Semi-strong form inefficiency
C. Strong form inefficiency
D. It has nothing to do with efficiency.
Step 1: Define Market Efficiency Forms
- Weak Form Efficiency: Prices reflect all historical price and volume data.
- Semi-Strong Form Efficiency: Prices reflect all publicly available information.
- Strong Form Efficiency: Prices reflect all information—public and private.
Step 2: Analyze the Observation
The pattern that stock rises by 2% one week and drops 3% the next suggests a predictable trend based on public information.
Step 3: Match to Efficiency Type
- This contradicts semi-strong form efficiency because the market fails to process public information efficiently.
- It also implies a degree of weak form inefficiency since historical patterns seem to predict future prices—but the nature of the info is public behavior, not just price history.
Conclusion: The best match is semi-strong form inefficiency since the market fails to adjust efficiently to public, observable patterns.