Evidence in support of the efficient markets hypothesis includes
A)the failure of technical analysis to outperform the market.
B)the small-firm effect.
C)the January effect.
D)excessive volatility.

Question

Quizplus · Accepted Answer

The efficient markets hypothesis states that all available information is immediately reflected in the price of a security, making it impossible for investors to consistently outperform the market through technical analysis or other means of predicting price movements. The fact that technical analysis has been unsuccessful in consistently beating the market supports the efficient markets hypothesis.

B, C, and D are not evidence in support of the efficient markets hypothesis. The small-firm effect (B) suggests that small-cap companies tend to have higher returns than large-cap companies, which contradicts the efficient markets hypothesis. The January effect (C) refers to the tendency for stocks to have higher returns in January, which some argue is due to the lag time in incorporating tax information into stock prices, not consistent with the instantaneous information incorporation of the efficient markets hypothesis. Excessive volatility (D) can occur in any market condition, including those that are efficient, and does not necessarily imply that prices are not reflective of all available information.

Evidence in Support of the Efficient Markets Hypothesis Includes