In a rebuttal to comments made by Dilbertico's fundamental analyst, Keith Howard states that future changes in stock prices cannot be predicted based on a company's institutional ownership. State which form of the efficient market hypothesis (EMH) Howard's statement supports and also state a type of empirical study which tests that form of the EMH.
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A. B. C.C
Keith Howard's statement suggests that future changes in stock prices cannot be predicted based on a company's institutional ownership. This aligns with the concept of the efficient market hypothesis (EMH), which states that financial markets are efficient in reflecting all available information in stock prices. The EMH is divided into three forms: weak, semistrong, and strong.
The weak form of the EMH asserts that current stock prices fully reflect all past market trading data, including historical prices and trading volume. In other words, it claims that it is impossible to consistently achieve superior returns by analyzing past stock price data. Trading rules tests are empirical studies used to test the weak form of the EMH. These tests examine whether trading strategies based on historical price patterns or technical indicators can consistently generate abnormal profits.
The semistrong form of the EMH goes further and states that current stock prices reflect not only past trading data but also all publicly available information. This includes financial statements, news releases, analyst reports, and other relevant information that is accessible to all investors. According to the semistrong form, it is not possible to consistently achieve above-average returns by analyzing publicly available information. One type of empirical study used to test the semistrong form of the EMH is an event study. Event studies analyze the market's reaction to specific events or announcements, such as earnings releases, mergers and acquisitions, or regulatory changes, to determine whether the market efficiently incorporates this information into stock prices.
Given Keith Howard's statement about the inability to predict stock prices based on institutional ownership, it aligns with the semistrong form of the EMH. This form of the EMH focuses on the idea that publicly available information, including institutional ownership, is already reflected in stock prices, making it difficult to gain an edge by analyzing this information.
Therefore, the correct answer is: B. Semistrong form of the EMH and trading rules test.