ACCA Financial Management (F9) Certification Practice Exam

What do investors operating under weak form efficiency believe about excess profits?

1. They can consistently achieve excess returns

2. They cannot make excess profits

3. They rely on rumors to make profits

4. They are always able to predict prices accurately

The correct answer is: They cannot make excess profits

Investors operating under weak form efficiency believe that current stock prices fully reflect all available historical price information. This means that past price movements and trading volumes do not provide any significant edge or insight into future price movements, making it impossible for investors to consistently achieve excess returns solely based on this information. The concept of weak form efficiency suggests that any attempts to utilize historical data to predict future prices will not outperform a random selection or passive investment strategy, leading to the conclusion that they cannot make excess profits through patterns derived from past prices. Other options suggest that investors could either depend on non-informational strategies or possess an ability to predict prices accurately, which does not align with the principles of weak form efficiency. The idea of relying on rumors also implies a belief in the potential for excess profits, which contradicts the assertion of weak form efficiency that precludes consistent excess returns based on historical data alone. Thus, the understanding of weak form efficiency revolves around the belief that consistent excess profits are unattainable through the analysis of past price information.