This question was discussed in detail during the April 2021 episode of the BIF Bites podcast!
The semi-strong form of the efficient market theory indicates which of the following?
- That current prices reflect past prices and all publicly available information.
- That not even insider information will produce superior results over time.
- That past performance is useless in predicting future price changes.
- That investors react quickly and accurately to new information leading to quick and accurate price adjustments.
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Correct answer: A. That current prices reflect past prices and all publicly available information.
In an efficient market, investors react quickly to new market-related information which leads to quick and accurate price adjustments. The Efficient Market Hypothesis (EMH) states that markets are, in fact, efficient and have three forms which describe which specific prices are reflected in the current pricing.
- Weak form: Past performance does not predict future price changes; technical analysis will not produce gains above market returns.
- Semi-strong form: Current prices reflect both past prices and all publicly available information. Technical analysis and fundamental analysis will not produce above market returns.
- Strong form: The market is fully efficient; Neither technical analysis, fundamental analysis, nor insider information will produce superior results over time.
CFP® Exam tip:
The CFP® Exam may ask you to identify a type of security that best captures a specific market theory. An investor that believes in any of the forms of the Efficient Market Hypothesis (EMH) will likely seek to invest in Index-based Exchange Traded Funds (ETFs).