Final answer:
The strong-form EMH suggests that all information is reflected in stock prices, making it impossible to consistently outperform the market average. Markets are thought to be effective at reaching equilibrium, but real-world issues like income disparities can affect this efficiency. Skepticism exists around the strong-form EMH, as reality shows that private information can sometimes influence prices before becoming widely known.
Step-by-step explanation:
The strong-form Efficient Market Hypothesis (EMH) posits that a stock market is 'strong-form efficient' if all information, both public and private (insider information), is already reflected in stock prices at all times. According to this theory, no one can achieve consistently higher returns than the average market performance because all available information is already priced into stocks. Therefore, not even insiders with confidential information would be able to gain an advantage and beat the market.
In assessing the fairness and effectiveness of markets in reaching equilibrium, the strong-form EMH suggests that markets are extremely effective, as all information is rapidly incorporated into market prices. However, the reality is often more nuanced. Markets may be efficient in theory, but allocative efficiency and productive efficiency may not coincide due to issues like income distribution, which can affect consumers' ability to pay and access goods and services.
An economist modeling stock market outcomes as depicted could find that deviations from predicted points might stem from the market's quick responses to new information, further illustrating the challenge of forecasting in an efficient market. However, the strong-form EMH is viewed with skepticism because it assumes a level of market efficiency that empirical evidence has not consistently supported, and private information sometimes does affect stock prices before it becomes public.