QuestionDecember 14, 2025

Strong form market efficiency states that the market incorporates all information in the stock price.Under strong form market efficiency, which of the followings is/are correct? 1) Each security in the market will have an annual rate of return equal to the risk -free rate. II) The price of any one security in that market will remain constant at its current level. III) Corporate insiders cannot earn excess returns by trading on their private information A I only B -It only C III only D II and III

Strong form market efficiency states that the market incorporates all information in the stock price.Under strong form market efficiency, which of the followings is/are correct? 1) Each security in the market will have an annual rate of return equal to the risk -free rate. II) The price of any one security in that market will remain constant at its current level. III) Corporate insiders cannot earn excess returns by trading on their private information A I only B -It only C III only D II and III
Strong form market efficiency states that the market incorporates all information in the stock price.Under strong form market efficiency, which of the followings is/are correct? 1) Each security in the market will have an annual rate of return equal to the risk -free rate. II) The price of any one security in that market will remain constant at its current level. III) Corporate insiders cannot earn excess returns by trading on their private information A I only B -It only C III only D II and III

Solution
4.5(306 votes)

Answer

C) III only Explanation 1. Recall strong form market efficiency Strong form efficiency means all information—public and private—is reflected in stock prices. Thus, no one (including insiders) can earn abnormal or excess returns. 2. Evaluate each statement - **I)** Incorrect — Returns still reflect risk; not all securities earn only the risk-free rate. - **II)** Incorrect — Prices still fluctuate with new information and changing expectations. - **III)** Correct — Insiders cannot earn excess returns, since all information (even private) is already priced in.

Explanation

1. Recall strong form market efficiency<br /> Strong form efficiency means all information—public and private—is reflected in stock prices. Thus, no one (including insiders) can earn abnormal or excess returns.<br />2. Evaluate each statement<br />- **I)** Incorrect — Returns still reflect risk; not all securities earn only the risk-free rate. <br />- **II)** Incorrect — Prices still fluctuate with new information and changing expectations. <br />- **III)** Correct — Insiders cannot earn excess returns, since all information (even private) is already priced in.
Click to rate:

Similar Questions