ACCA Financial Management (F9) Certification Practice Exam

What does weak form efficiency imply regarding market prices?

1. Reflects all historical information

2. Incorporates both public and private information

3. Market prices are based on future estimates

4. Investors cannot make excess profits

The correct answer is: Reflects all historical information

Weak form efficiency is a concept from the Efficient Market Hypothesis (EMH) which asserts that all past trading information is already reflected in current market prices. This means that historical prices and trading volumes have been accounted for, and as a result, it is impossible for investors to achieve excess returns based solely on this information. Since past information does not help in predicting future price movements, investors cannot consistently gain an advantage through analysis of historical data alone. The implications of this efficiency suggest that technical analysis, which relies heavily on historical price patterns, would be ineffective in generating excess profits. In this context, the market reacts swiftly to new information, and any patterns or trends established through past data would not be useful in predicting future price changes. While the other options consider elements of market efficiency, none accurately convey the fundamental principle of weak form efficiency as it relates specifically to historical information. In summary, weak form efficiency asserts that all historical information is already reflected in current asset prices, meaning that historical data alone cannot be used to predict future price movements.