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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

A research analyst studies 40 years of daily Sensex returns and finds that the correlation between today's return and yesterday's return is practically zero. Which form of market efficiency does this finding most directly support?

The finding supports weak form efficiency. Zero correlation between successive returns shows past price changes cannot predict future ones, which is exactly what the weak form states. It does not test public information or insider information, so semi-strong or strong form conclusions would be unjustified.

  1. AWeak form efficiency, because past price changes carry no predictive informationCorrect
  2. BSemi-strong form efficiency, because public announcements are fully reflected
  3. CStrong form efficiency, because insiders cannot earn abnormal returns
  4. DInefficiency, because zero correlation shows prices move randomly without information

Explanation

Zero serial correlation in returns means past price data cannot be used to predict future prices, which is the test of weak form efficiency. It says nothing directly about public announcements or insider information, so the semi-strong and strong claims do not follow. Random movement is itself consistent with efficiency, not evidence against it.

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