Which one of the following best describes the current understanding of market efficiency?
A) The market tends to overreact to new information in a manner which can be used to earn abnormal returns.
B) Markets under-react to unanticipated events in a manner which can be used to earn excess returns.
C) The market appears to be highly inefficient.
D) Short-term market movements are difficult, if not impossible, to predict accurately.
E) Markets tend to react slowly to unanticipated announcements.

Question

Quizplus · Accepted Answer

The current understanding of market efficiency is that short-term market movements are difficult, if not impossible, to predict accurately. This suggests that markets are generally efficient and that any abnormal returns that can be earned are likely due to factors other than market inefficiency. Option A and B suggest that the market is not efficient, while option C implies that the market is highly inefficient, which is not supported by empirical evidence. Option E suggests that markets are inefficient in reacting to unanticipated announcements, which is inconsistent with the efficient market hypothesis. Therefore, option D is the best answer.

Which One of the Following Best Describes the Current Understanding