The Strong Form of the Efficient Market Hypothesis

A

The Efficient Market Hypothesis (EMH) is a theory that suggests that financial markets are efficient and that it is impossible to consistently achieve above-average returns by using publicly available information. The EMH has three forms: weak form efficiency, semi-strong form efficiency, and strong form efficiency.

• Weak form efficiency: This form of the EMH states that security prices fully reflect all past market data and trading information. In other words, under weak form efficiency, current security prices already incorporate all historical price movements and patterns. Therefore, analyzing past price data, such as technical analysis or chart patterns, would not provide an investor with an advantage in predicting future price movements. This implies that it is not possible to consistently earn excess returns by solely relying on historical price data.

• Semi-strong form efficiency: This form of the EMH goes a step further and states that security prices fully reflect all publicly available information. This includes not only past market data but also information such as financial statements, news announcements, and other publicly accessible data. In a semi-strong form efficient market, any publicly available information is quickly and accurately incorporated into security prices, making it difficult for investors to consistently outperform the market by trading on publicly known information.

• Strong form efficiency: This is the most stringent form of the EMH, asserting that security prices fully reflect all public and private information. In addition to publicly available information, strong form efficiency includes private or insider information. If the market is strong form efficient, it means that even insiders with access to non-public information cannot consistently earn excess returns by trading on that information. In practice, strong form efficiency is often considered an idealized theoretical concept because it is difficult to prove that all private information is fully reflected in security prices.

Based on the description provided, the correct answer to the question is: C. Semi-strong form efficiency, as it states that security prices fully reflect all public and private information.