Question

In an efficient market, prices appear to move randomly becauseA) investors do not process new information correctly.B) only new information affects stock prices.C) insider trading has an unpredictable effect on stock prices.D) the number of investors who can forecast prices correctly is too small to have any effect.

Answer 1

Answer:

Correct answer is B.

Explanation:

B is correct. In the Strong-form efficient market hypothesis, all public and private information is reflected in prices and it is impossible for anyone to outperform the market. Only new information affects stock prices, but then, this new information is processed correctly and reflected in the price of an asset so fast before anyone can act on it. As a result, the price action becomes totally unpredictable and prices appear to move randomly.