Which of the following statements about the implications of tests for the efficient market hypothesis (EMH) is FALSE?
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A. B. C. D.Explanation
Other than corporate insiders and market specialists, no other group has monopolistic access to information, which supports the strong-form EMH. The other statements are true.
The correct answer is D. The statement that "The best way to measure the performance of investment professionals is against a randomly selected buy-hold strategy of stocks (assuming the same risk level)" is FALSE.
The efficient market hypothesis (EMH) is a theory that states that financial markets are efficient and that the prices of assets already reflect all available information. According to the EMH, it is not possible to consistently achieve above-average returns through trading or analysis of publicly available information because such information is quickly and accurately reflected in the prices of securities.
Let's go through each answer choice to understand why D is the correct answer and the other statements are true:
A. By purchasing an index fund, an investor can match the market return and minimize costs. This statement is true. Index funds are designed to replicate the performance of a specific market index, such as the S&P 500. By investing in an index fund, an investor can achieve a return that closely matches the performance of the overall market. Additionally, index funds generally have lower costs compared to actively managed funds, making them an efficient choice for many investors.
B. Technical trading rules do not consistently provide excess returns after adjusting for trading costs and taxes. This statement is true. Technical trading rules involve using past price patterns, trends, and other technical indicators to predict future price movements and make trading decisions. However, numerous studies have shown that these rules do not consistently generate excess returns after accounting for trading costs and taxes. The EMH suggests that if such rules were consistently profitable, market participants would quickly exploit them, leading to their disappearance.
C. Other than corporate insiders and market specialists, most traders have monopolistic access to information, which rejects the strong-form EMH. This statement is also true. The EMH is categorized into three forms: weak, semi-strong, and strong. The strong-form EMH assumes that no one has monopolistic access to information, including corporate insiders and market specialists. However, the statement correctly points out that other than these specific groups, most traders do not possess monopolistic access to information. This observation rejects the strong-form EMH.
D. The best way to measure the performance of investment professionals is against a randomly selected buy-hold strategy of stocks (assuming the same risk level). This statement is FALSE. The best way to measure the performance of investment professionals is not against a randomly selected buy-and-hold strategy. Instead, it is typically measured against a relevant benchmark that represents the investment strategy or asset class being evaluated. Comparing the performance of investment professionals against a randomly selected buy-and-hold strategy would not provide meaningful insights into their skill or ability to generate excess returns.
In summary, the false statement is D because measuring the performance of investment professionals against a randomly selected buy-and-hold strategy is not the best approach.