ACCA Financial Management (F9) Certification Practice Exam

In strong form efficiency, what do market prices include?

1. Only public information

2. Only historical information

3. All public and private information

4. Future predictions

The correct answer is: All public and private information

In the context of strong form efficiency, market prices reflect all available information, encompassing both public and private information. This concept is rooted in the Efficient Market Hypothesis (EMH), which posits that securities markets are 'informationally efficient.' Thus, if a market is operating under strong form efficiency, it means that no investor can achieve excess returns based on any information, whether it is public (such as financial statements and news reports) or private (such as insider information). This understanding is significant because it implies that even individuals with access to non-public information (insiders of the firm, for instance) cannot gain an advantage over the market. The notion is that any relevant information is already incorporated into stock prices, leaving all investors on a level playing field. Therefore, the correct answer reflects the comprehensive nature of market information in strong form efficiency. Other options, like the inclusion of only public information or historical information, do not capture the full spectrum of information that influences market prices in a strongly efficient market. Future predictions typically fall outside the realm of current market prices as they are speculative and not factual, further reinforcing why they do not fit within the definition of strong form efficiency.