CMA Final · Strategic Financial Management · Efficient Market Hypothesis
A analyst tests weak-form efficiency on Nifty-listed stock Surya Ltd. Using 101 daily returns she finds the first-order serial correlation coefficient is 0.02, statistically insignificant. A trading rule based on past prices earns no excess return after costs. Which conclusion is most consistent with this evidence?
The evidence is consistent with weak-form efficiency. Insignificant serial correlation and no profit from past-price trading rules show that historical prices carry no exploitable information. The test uses only price history, so it cannot prove or disprove semi-strong or strong forms.
- ASemi-strong form is proven false because prices ignore public news
- BPast price information cannot be used to earn abnormal returns, consistent with weak-form efficiencyCorrect
- CStrong form is proven true because insiders earn no gains
- DPrices follow a predictable cycle that technical analysts can exploit
Explanation
Insignificant serial correlation and no profitable rule based on past prices support weak-form efficiency. The test uses only historical prices, so it says nothing proven about semi-strong or strong forms.
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