What does "market efficiency" mean?

Market efficiency refers to the extent to which stock prices incorporate and reflect all available information. This concept is a key component of the Efficient Market Hypothesis (EMH), which asserts that asset prices in a financial market fully reflect all relevant information at any given time. In an efficient market, any new information that could affect a company's stock price is quickly and accurately incorporated into the stock price, meaning that it is impossible to consistently achieve higher returns than the market average without taking on additional risk.

The classification of market efficiency typically encompasses three forms: weak, semi-strong, and strong. Weak form efficiency implies that stock prices reflect all past trading information. Semi-strong form efficiency includes all publicly available information, while strong form efficiency encompasses all information, both public and private. The correct understanding of market efficiency highlights that, under the semi-strong form, stock prices adjust rapidly to new publicly available information, reflecting it in current prices.

Other options touch upon aspects related to market behavior or characteristics, such as competition and volatility, but they do not capture the essence of market efficiency in the way that the correct choice does. Thus, the concept focuses on the breadth of information being fully factored into stock pricing.