Answer:
D) no one can consistently earn abnormal profits
Explanation:
The efficient market hypothesis tells us that in the stock market the participants interact in such a way that they generate an equilibrium situation, where the market prices of the securities reflect their intrinsic or real price.
Under this scenario, financial assets reflect all the information known to market participants, including their beliefs, valuations, and expectations; and react quickly to the new data that may arise in the market (the so-called fundamentals).
Eugene Fama, the developer of this hypothesis, originally proposed three versions: the weak, the semi-strong and the strong. I will explain very briefly the first two and I will go deeper into the last one, which is the object of the question.
The weak version says that changes in security prices are random and therefore it is very difficult to predict them.
The semi-strong version states that while all the information that market participants have is reflected in security prices, unanticipated announcements may cause abnormal profits.
Finally, the strong version assumes that all information (both public and private) is reflected in the current security prices. In this context of perfect information, investors cannot make use of extra or privileged information that can give them an advantage in the market, since this information would not exist at all. Consequently, although they can generate profits, they could never exceed normal market returns. Thus, the other three options are discarded: a). A select few institutional investors can earn abnormal profits), b). Abnormal profits are randomly distributed, and c). No one can consistently earn a profit.
