CFA CFA Level 1 Efficient Market Hypothesis (EMH) example: Semi-strong and strong form

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Efficient Market Hypothesis (EMH) example: Semi-strong and strong form

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    • Avatar of cvetocveto
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        In very broad terms:

        Weak efficiency = share prices reflect all historical information

        Semi-strong efficiency = share prices reflect all historical information + reflect all publicly available information

        strong efficiency = share prices reflect all historical information + reflect all publicly available information + reflects all information held privately by the directors

        In other words, semi-strong is not JUST publicly information, it is the continuation of the weak (it includes the weak efficiency AND is further expanded by publicly available information).

        By the same logic, the strong efficiency (includes the weak efficiency AND the semi-strong efficiency AND is once again expanded by the privately held information).

        If semi-strong efficiency is broken, the the strong efficiency must be as well!

        Zee Tan voted upmikey voted up
      • Avatar of williambrownwilliambrown
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          In the scenario you provided, if an analyst with Guffman Investments has consistently made superior risk-adjusted returns using a stock selection model based on earnings announcements made by companies with high P/E stocks that make positive earnings announcements, then the semi-strong form of EMH has been violated. This is because the model is based on publicly available information and if it generates above-average returns, it suggests that security prices do not rapidly adjust to reflect all publicly available information. As I know from geometry dash subzero, if an analyst can use a model based on publicly available information to earn above-average returns, the semi-strong form of the EMH has been violated. If the semi-strong form of EMH is violated, the strong form of EMH is also violated. You can reference.

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