Question

A fully efficient market will eliminate which of the following:

A) All abnormal profits except those related to insider trading

B) Unexpected price declines

C) Cyclical patterns

D) Price increases over any period of time in excess of six months

E) Daily price fluctuations

Answer 1

Efficient market hypothesis:

The security prices already reflect all the available information.

The efficient market hypothesis says that past price movement, earnings report and volume traded doesn't affect stocks Current price and can't be used to predict the stocks future directions.

They are 3 levels of Market efficiency:
1. Strong/Full efficiency: Insider information, fundamental analysis and technical analysis are unless in such a market.
2. Semi- Strong: fundamental analysis and technical analysis are unless in such a market.
3. Weak: technical analysis is unless in such a market.

In simple words, past performance doesn't guarantee the future performance of the stock price moment. The stock price follows a Brownian motion. That is stock price moment is random that's why it's also called a random walk theory.

So the cycling patterns are eliminated in a fully efficient market.

The answer is C. Cyclic Patterns.