Your best friend works in the ﬁnance oﬃce of the Delta Corporation. You are aware that this friend trades Delta stock based on information he overhears in the oﬃce. You know that this information is
Not known to the general public. Your friend continually brags to you about the proﬁts he earns
Trading Delta stock. Based on this information, you would tend to argue that the ﬁnancial markets
Are at best _____ form eﬃcient.

Question

Quizplus · Accepted Answer

The situation described suggests that your best friend is trading Delta stock based on insider information, which is not known to the general public, but is known to your friend and other employees in the finance office. This type of information falls under the category of semi-strong form efficiency because it is not publicly available but is still known by some market participants (i.e. employees of the company). Therefore, it is possible for an investor like your friend to earn abnormal profits by trading on this information, which suggests that the financial markets are not perfectly efficient. However, this does not necessarily mean that the markets are completely inefficient either, as there may be other forms of information that are priced into the stock already.

Your Best Friend Works in the ﬁNance Oﬃce of the Delta