Explanation
In semi-strong-form efficient markets, all publicly available information is already reflected in security prices. This means:
- Technical analysis (exploiting patterns of prices) would not be effective because past price patterns cannot predict future prices.
- Fundamental analysis cannot earn consistent abnormal returns because all public information is already incorporated into prices.
- However, fundamental analysis can help investors understand the value implications of information - it helps them interpret what information means for a company's intrinsic value, even though they cannot consistently earn abnormal returns from it.
Key points:
- Semi-strong efficiency: All public information is reflected in prices
- Fundamental analysis: Can help understand what information means for valuation
- Cannot earn abnormal returns: Because the market has already processed the information
- Option C is correct: Fundamental analysis helps understand value implications
- Option A is incorrect: Price pattern exploitation is technical analysis, not fundamental analysis
- Option B is incorrect: Consistent abnormal returns are not possible in efficient markets
This question tests understanding of the different forms of market efficiency and what types of analysis can be effective in each.
