Final answer:
The strong-form efficient market hypothesis suggests that stock prices reflect all available information, and it implies that analysts cannot easily forecast stock price changes. Financial markets are considered to be rational, and stock returns do not follow a particular pattern.
Step-by-step explanation:
The strong-form efficient market hypothesis suggests that stock prices reflect all available information. Based on this hypothesis, the following statements are true:
- Analysts cannot easily forecast stock price changes because stock prices already incorporate all available information.
- Financial markets are rational in the sense that stock prices reflect all available information and pricing is efficient.
- Stock returns do not follow a particular pattern because all relevant information is incorporated into stock prices.
According to the strong-form efficient market hypothesis, only the statement that stock prices reflect all available information is true. It suggests that forecasting stock price changes or discerning patterns in stock returns is not viable since all information is already incorporated into stock prices, making markets rational in price determination.
If the strong-form efficient market hypothesis holds true, the assertion that stock prices reflect all available information would be the accurate statement. In a market where the strong-form efficiency is present, all information, whether public or private, is already reflected in stock prices. Hence, it would be virtually impossible for analysts to consistently forecast stock price changes based on new information, as it would already be incorporated into the stock prices.
Furthermore, the hypothesis suggests that markets are rational in the sense that prices at any given moment represent the best, unbiased estimate of the value of an asset. Therefore, the statement that financial markets are irrational would not be true under this hypothesis. Similarly, the claim that stock returns follow a particular pattern would be incorrect because if all knowable information is already priced in, stock prices would move only when new, unpredictable information becomes available, thus negating the possibility of a discernible pattern.
Following the principles of the strong-form efficiency, it would be extremely challenging for stock market analysts and individual investors to gain an edge by predicting stock price movements, as the current stock prices would incorporate all known information, including insider information and expert analysis. The focus would then shift from predicting price movements to identifying undervalued companies that the market overall has not fully appreciated yet, despite all the information being available.