Question

Find below several statements about financial markets. Classify them with respect to market-efficiency. Choose the strongest form of efficiency prevailing from the set of the following four options:

• Markets are inefficient

• Weak efficiency

• Semi-strong efficiency

• Strong efficiency

Provide a brief rationale for your decision.

a) New information about a stock is instantaneously incorporated in the stock price.

b) A friend working in a computer company gives you the confidential information that they will release a new innovative product soon. You make a trading strategy based on this and gain a lot of money.

c) By analyzing historic data you find out that there are high returns after Swedish public holidays. You construct a successful trading strategy that exploits this relationship.

d) A professional wall-street trader identifies stocks by a sophisticated trading strategy. An ape randomly points at stocks in the Financial Times and invests in those assets. The ape outperforms the banker in terms of risk-adjusted excess returns

Answer 1

A. Markets are Strongly efficient as new informations are incorporated instantaneously into the price of the stock

B. Markets have semi strong efficient as private data is not incorporated into the price so private information from friends can helo you earn

C. Markets have weak efficiency as publicly available information are not even incorporated into the price and historical patterns are not priced

D. Markets have high inefficiency as any random can beat professionals by choosing stocks which goes against principle of an efficient market.