If the financial markets are semi-strong form efficient, then:

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Question restatement: If the financial markets are semi-strong form efficient, then:

Option 1: 'only the most talented analysts can determine the true value of a security.' This claim contradicts semi-strong form efficiency, which asserts that all publicly available information is already reflected in prices. If this were true, even the most talented analysts could not consistently uncover mispriced securities using public information.

Option 2: 'only individuals with private information have a marketplace advantage.' This describes private (insider) information and corresponds to the strong form (or at least a broader form of asymmetric information considerations), not the semi-strong form. Semi-strong form excludes the possibility of earning abnormal returns using public information, so private information would still confer an advantage, but that is outside the semi-strong assumption.

Option 3: 'technical analysis provides the best tool to use to gain a marketplace advantage.' Technical analysis relies on price patterns and past trading data, which would be inconsistent with semi-strong form efficiency. If markets fully reflected all public information, simple technical patterns would not reliably generate excess returns, undermining this claim.

Option 4: 'no one individual has an advantage in the marketplace.' This aligns with the semi-strong form, which holds that all publicly available information is already incorporated into prices, leaving no consistent edge for individuals who only rely on public information.

Option 5: 'every security offers the same rate of return.' This is not a direct implication of semi-strong form efficiency. Even in efficient markets, different securities can have different risk profiles, expected returns, and volatilities; the form speaks to information reflection, not uniform returns across securities.

Further reasoning: In semi-strong form efficiency, prices adjust rapidly to new public information such that no abnormal returns can be earned by trading on that information after its release. The key takeaway is that publicly available data is already priced in, making it difficult for an average investor to consistently outperform the market using such information. None of the other statements correctly capture the implication of semi-strong efficiency, which centers on the informativeness of public information and the difficulty of beating the market with it.

In summary, when evaluating the statements under semi-strong form efficiency, the assertion that no single investor has a persistent advantage based on public information is the one that coheres with the theory, while the other options imply forms of information access or analytical approaches that would threaten semi-strong efficiency if they yielded consistent abnormal returns. The analysis highlights why relying solely on public information, technical patterns, or claiming universal returns does not align with the semi-strong framework.

FNBSLW 344-23 Chapter 10 Practice Quiz (not graded)

If the financial markets are semi-strong form efficient, then:

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