An efficient market does not require that:

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BlackTom AI · Accepted Answer

When evaluating what an efficient market does not require, it helps to recall the core tenets of efficient market theory.

Option A: 'Stock prices incorporate all information.' In an efficient market, prices reflect all available information, so this statement is aligned with the theory and is not something the market would ignore. It is a characteristic rather than a requirement that would be false in a non-efficient market.

Option B: 'All known information be reflected in prices.' This is essentially another way of saying that prices incorporate all known information (the semi-strong form). In an efficient market, publicly available information should be quickly incorporated into prices, so this is also consistent with efficiency.

Option C: 'Price adjustments occur very quickly.' One implication of an efficient market is that prices adjust rapidly to new information, reducing predictability of abnormal returns. Therefore, rapid adjustments are a feature of much efficient market models.

Option D: 'Each adjustment is perfect.' The idea of perfect adjustment implies that every change in information is reflected exactly and without error in prices, which is an unattainable ideal. Real markets experience frictions, noise, and imperfect adjustments, so this is not a requirement of an efficient market and is more of a theoretical exaggeration.

In summary, the statements A, B, and C describe aspects consistent with efficient markets, while D describes an unrealistic perfection that the market does not require or achieve in practice.

ACCT3563-Issues in Financial Reporting and Analysis - Term 3, 2025

An efficient market does not require that:

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