CFA Level IEquity InvestmentsEasy
A market is found to be semi-strong-form efficient based on empirical event studies. Which of the following is most consistent with this finding?
- ATechnical analysis of past price and volume patterns can reliably generate abnormal returns
- BInvestors can earn consistent abnormal returns using insider information not yet public
- CStock prices adjust rapidly and fully to newly released public information, such as earnings announcements
- DPrices only reflect historical trading data and lag behind new public disclosures
Show answer & explanationAnswer & explanation
Correct answer: C. Stock prices adjust rapidly and fully to newly released public information, such as earnings announcements
Semi-strong-form efficiency asserts that security prices reflect all publicly available information, including financial statements and news, and adjust quickly to new public information, making it impossible to earn abnormal returns using such information.
Why the other options are wrong
- A. Incorrect; technical analysis relies on past price/volume data, which is refuted even by weak-form efficiency.
- B. Incorrect; earning returns from nonpublic information relates to strong-form efficiency, which semi-strong efficiency does not address.
- D. Incorrect; this describes market inefficiency, the opposite of semi-strong-form efficiency.
Semi-Strong-Form Efficiency
A market condition in which security prices fully and quickly reflect all publicly available information, so fundamental analysis of public data cannot generate abnormal returns.
- Includes financial statements, news, and economic data
- Implies technical AND fundamental analysis of public info are unproductive
- Tested via event studies around announcements
Memory trick: Semi-strong: news hits, price shifts instantly.