Ann uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Dotson Co.'s historical prices. Secondly, she analyzes the financial statements of The Allen Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Ann earns abnormal profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least ________ efficient but less than ________ efficient.
A)weak form; mild form
B)mild form; semistrong form
C)weak form; semistrong form
D)semistrong form; full form
E)semistrong form; strong form

Question

Quizplus · Accepted Answer

Ann's ability to earn abnormal profits using her return on equity strategy suggests that the market is not semistrong efficient (which assumes all publicly available information is reflected in stock prices) but weak form efficient (which assumes only historical price information is reflected in stock prices). However, since Ann is not earning abnormal profits with her historical prices strategy, this suggests the market is at least weak form efficient but potentially less than semistrong form efficient. Therefore, the best answer is C, which includes both weak form and semistrong form efficiency as possibilities.

Ann Uses Two Approaches to Trading Stocks