Question

Employees at a pharmaceutical company make large profits by buying shares of the firm when the trials of a drug begin but before the results are announced. Which form of the efficient market hypothesis does this contradict?

Answer 1

Answer:

The correct answer is letter "C": Strong form.

Explanation:

The Efficient Market Hypothesis (EMH) is the theory that beating the market is impossible because current stock prices reflect all the information investors need to trade the markets. Technical and fundamental analysis remain useless in trying to predict future price action.

The EMH could be classified as the Weak, Strong, and Semi-Strong EMH. The strong form of the EMH establishes that insider information and public information are already in the current stock price, then, there is no special data that could provide an advantage to an investor to take advantage of the market.

In such a case, the strong form of the EMH is opposed to the idea given in the example since it is proposing insider information gives employees an advantage to make large profits before the information of trial drugs is spread among the public.