ACCA Financial Management (F9) Certification Practice Exam

Which hypothesis states that asset prices reflect all publicly available information about a share's value?

1. Weak form efficiency

2. Semi-strong form efficiency

3. Strong form efficiency

4. Efficiency Market Hypothesis

The correct answer is: Efficiency Market Hypothesis

The hypothesis that states asset prices reflect all publicly available information about a share's value is known as the semi-strong form efficiency. This concept is part of the Efficient Market Hypothesis (EMH) framework which posits that stock prices adjust rapidly to new public information, meaning that investors cannot consistently achieve higher returns than average market returns through analysis of publicly available information. In semi-strong form efficiency, it's assumed that all publicly accessible data, including news releases, financial reports, and other relevant information that could influence a share’s value, is already included in the stock prices. Therefore, strategies based on public information are unlikely to yield superior returns, as the prices already reflect that information. Weak form efficiency focuses only on historical prices and trading volumes, suggesting that past prices do not predict future prices. Strong form efficiency is a broader concept that includes all information, both public and private (insider information), implying that even insider trading cannot provide an advantage. Thus, semi-strong form is the appropriate answer when discussing the reflection of publicly available information in asset prices.