If the efficient market hypothesis holds true, which of the following statements is correct?

If the efficient market hypothesis holds true, which of the following statements is correct?

• A. Fundamental analysis cannot be used to beat the market.
• B. Technical trading rules can provide above-average returns.
• C. Technical analysis is not worthwhile.
• D. Trading on insider information may result in above-normal profits.

Answer: (C)

The efficient market hypothesis (EMH) asserts that all available information is already reflected in asset prices, meaning that it is impossible to consistently achieve above-average returns through either fundamental or technical analysis. When considering the statements presented, the notion that technical analysis is not worthwhile aligns with the principles of the EMH. According to this hypothesis, since prices reflect all known information, attempts to predict future price movements based on past price data (as technical analysis does) will not yield consistent profits. Therefore, investors cannot reliably profit from technical analysis because any price patterns have already been incorporated into current stock prices. In contrast, the other statements do not align as neatly with the implications of the EMH. Fundamental analysis, while useful for understanding a company’s financial health, is deemed ineffective in consistently beating the market under EMH. Similarly, technical trading rules and insider information would suggest that there are methods to achieve abnormal returns, which contradicts the core idea of market efficiency where such edges should not exist. Thus, the assertion that technical analysis is not worthwhile because it can't consistently result in abnormal returns is a correct interpretation of the efficient market hypothesis.

The efficient market hypothesis (EMH) asserts that all available information is already reflected in asset prices, meaning that it is impossible to consistently achieve above-average returns through either fundamental or technical analysis. When considering the statements presented, the notion that technical analysis is not worthwhile aligns with the principles of the EMH.

According to this hypothesis, since prices reflect all known information, attempts to predict future price movements based on past price data (as technical analysis does) will not yield consistent profits. Therefore, investors cannot reliably profit from technical analysis because any price patterns have already been incorporated into current stock prices.

In contrast, the other statements do not align as neatly with the implications of the EMH. Fundamental analysis, while useful for understanding a company’s financial health, is deemed ineffective in consistently beating the market under EMH. Similarly, technical trading rules and insider information would suggest that there are methods to achieve abnormal returns, which contradicts the core idea of market efficiency where such edges should not exist. Thus, the assertion that technical analysis is not worthwhile because it can't consistently result in abnormal returns is a correct interpretation of the efficient market hypothesis.