Ann uses two approaches to trading stocks.First,she trades on what she believes is a repetitive pattern as seen in Dotson Co's historical prices.Secondly,she analyzes the financial statements of The Allen Co.to compute changes in the return on equity as a predictor of future stock prices for that firm.She trades based on both strategies.Ann earns excess profits on her return on equity strategy but not on her historical prices strategy.This suggests that the market is at least ________ efficient but less than ________ efficient.
A) weak-form; mild-form
B) mild-form; semistrong-form
C) weak-form; semistrong-form
D) semistrong-form; full-form
E) semistrong-form; strong-form

Question

Quizplus · Accepted Answer

Ann's failure to earn excess profits based on her historical prices strategy suggests that the market is at least weak-form efficient (meaning historical prices and patterns cannot be used to consistently beat the market). However, her success in earning excess profits based on her return on equity strategy suggests that the market is less than semistrong-form efficient (meaning publicly available information such as financial statements can be used to earn excess profits). Therefore, the market is at least weak-form efficient but less than semistrong-form efficient.

Ann Uses Two Approaches to Trading Stocks