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Caleb Gold is studying for the Level 1 CFA examination with a fellow group of first year MBA students at the London School of Economics. During that night's study session, Stephan LeMond, the self-proclaimed group "leader," gives a short presentation on the forms of the efficient market hypothesis (EMH). As Gold listens, he hears LeMond make an obviously incorrect statement. He quickly speaks up, and identifies which of the following statements as INCORRECT?
A. The semi-strong form EMH addresses market and non-market public information.
B. The weak-form EMH states that stock prices reflect current public market information and expectations.
C. The strong-form EMH assumes perfect markets.
D. The weak-form EMH suggests that technical analysis will not provide excess returns while the semi- strong form suggests that fundamental analysis cannot achieve excess returns.
Answer: B
Explanation:
Explanation/Reference:
Explanation:
The weak-form EMH assumes the price of a security reflects all currently available historical information.
Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.
The other statements are true. The strong-form EMH states that stock prices reflect all types of information: market, non-public market, and private. No group has monopolistic access to relevant information; thus no group can achieve excess returns. For these assumptions to hold, the strong-form assumes perfect markets - information is free and available to all.
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