According to the Efficient Market Hypothesis (EMH), which of the following scenarios is most consistent with a weak-form efficient market?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Weak-form EMH states that current asset prices fully reflect all information contained in the history of past prices and trading volume, so past price/volume patterns cannot be used to earn consistent abnormal returns.

1) Relevant knowledge points and concepts
- Efficient Market Hypothesis (EMH) has three forms: weak, semi-strong, and strong.
  - Weak-form: prices reflect all past market trading information (prices, volumes). Technical analysis based on past data should not yield consistent excess returns; prices follow a random walk or have no predictable serial correlation.
  - Semi-strong: prices reflect all publicly available information (including financial statements, news); only private information could produce excess returns.
  - Strong-form: prices reflect all public and private information; even insiders cannot earn abnormal returns.

2) Step-by-step reasoning
- The question asks which scenario is most consistent with weak-form efficiency.
- Weak-form implies that using past price and volume data (technical analysis) will not allow an investor to consistently beat the market.
- Therefore the correct scenario must state that past price and volume data cannot be used to earn abnormal returns.

3) Calculations
- No numeric calculations are required; the conclusion is based on definitions and logical implication.

4) Why the correct answer is correct
- Option d directly restates the defining implication of weak-form EMH: past price and volume data contain no exploitable information for consistent abnormal profits. This matches the weak-form definition.

5) Why the other options are incorrect
- a: “Insider trading leads to consistent excess profits.” Insider trading uses private information; if that consistently earned profits, the market would not be semi-strong or strong; this statement is not the defining property of weak-form EMH.
- b: “Stock prices instantly reflect all public and private information.” That describes the strong-form EMH (and is stronger than weak-form).
- c: “Technical analysis reflecting past prices and volumes consistently generates abnormal returns.” This contradicts weak-form EMH because weak-form says past data cannot be used to earn consistent abnormal returns.

6) Conclusion
- The correct answer is d. This matches the provided answer: d. Past price and volume data cannot be used to earn abnormal returns.

According to the Efficient Market Hypothesis (EMH), which of the following scenarios is most consistent with a weak-form efficient market?[Fill in the blank]Single choice

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