LSAT (Law School Admission Test)Reading ComprehensionHard
Passage: "The 'efficient market hypothesis' (EMH) posits that asset prices fully reflect all available information. Strong-form EMH suggests that even insider information is reflected, implying no investor can consistently achieve abnormal returns. Semi-strong form EMH states that all publicly available information is reflected, making technical and fundamental analysis futile for outperformance. Weak-form EMH claims only past price and volume data are reflected, meaning technical analysis is useless, but fundamental analysis might still yield an edge. While the EMH provides a compelling theoretical framework, empirical evidence offers mixed results. Anomalies such as the 'January effect' or the sustained outperformance of certain active managers challenge its stronger forms, prompting ongoing debate about the true efficiency of financial markets." If an investor were able to consistently profit by analyzing publicly available financial reports and company news, which form(s) of the Efficient Market Hypothesis would be most directly contradicted?
- AStrong-form EMH only.
- BWeak-form EMH only.
- CSemi-strong form EMH only.
- DBoth weak-form and semi-strong form EMH.
Show answer & explanationAnswer & explanation
Correct answer: C. Semi-strong form EMH only.
The passage states that 'Semi-strong form EMH states that all publicly available information is reflected, making technical and fundamental analysis futile for outperformance.' If an investor *can* consistently profit using publicly available information (like financial reports and company news, which fundamental analysis uses), then semi-strong form EMH is directly contradicted. Weak-form EMH only concerns past price/volume data, not publicly available reports, so it would not be contradicted.
Why the other options are wrong
- A. Strong-form EMH is about insider information. Profiting from publicly available information doesn't directly contradict strong-form EMH, which is a higher bar for efficiency.
- B. Weak-form EMH only says past price/volume data are reflected, implying fundamental analysis (using public reports) *might* still yield an edge. So, profiting from public reports does not contradict weak-form.
- D. As explained, weak-form EMH is not contradicted because it leaves room for fundamental analysis to be effective. Therefore, this option is incorrect.
Conditional Inference
Drawing a conclusion based on a hypothetical condition ('If X is true, then what must follow according to the passage?').
- Requires careful reading of conditional statements or implications.
- Tests understanding of cause-and-effect or logical relationships.
- Often involves applying a passage's rule to a new scenario.
Memory trick: What future unfolds if this condition comes true?