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 asserts that current security prices fully incorporate all information contained in past trading data (historical prices, returns, and volumes), so that technical or pattern-based trading on that information cannot reliably produce abnormal returns.

1) Relevant knowledge points and concepts
- EMH has three forms: weak, semi-strong, and strong.
  - Weak form: market prices reflect all historical price and volume information.
  - Semi-strong form: prices reflect all publicly available information (financial statements, news).
  - Strong form: prices reflect all information, public and private (including insider information).
- “Abnormal returns” means returns above those justified by risk-adjusted expected return models.

2) Step-by-step reasoning
- The weak form implies past price/volume data offer no predictive edge; technical analysis based solely on these data should not systematically beat the market.
- Option (a) directly states that past price and volume data cannot be used to earn abnormal returns, which is the textbook description of weak-form efficiency.
- Option (b) claims prices instantly reflect all public and private information — that is the definition of strong-form efficiency, not weak form.
- Option (c) claims technical analysis consistently generates abnormal returns — this contradicts weak-form efficiency, because technical analysis uses past prices/volumes.
- Option (d) says insider trading leads to consistent excess profits; that implies private information is not incorporated into prices (contradicting strong form), and while such a statement could be true in some non-strong markets, it is not the defining characteristic of weak form.

3) Calculations
- No numerical calculations are required; the conclusion follows from definitions.

4) Why the correct answer is correct
- (a) encapsulates the core proposition of weak-form EMH: historical price/volume data are already reflected in current prices, so they cannot be used to earn systematic abnormal returns.

5) Why other options are incorrect (brief)
- (b) describes strong-form EMH.
- (c) contradicts weak-form EMH.
- (d) refers to insider/private-information effects and is not the defining statement of weak-form efficiency.

Conclusion: The correct choice is (a). This matches the provided answer.

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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