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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

A researcher tests whether past price changes of a stock help predict future price changes by computing the serial correlation of daily returns. The correlation coefficient comes out statistically indistinguishable from zero. Which form of market efficiency is directly supported by this finding?

The finding supports weak form efficiency. Serial correlation tests rely only on historical price data, and an insignificant correlation shows past prices cannot predict future returns. Semi-strong and strong forms involve public and private information, which this test does not examine.

  1. AWeak form efficiencyCorrect
  2. BSemi-strong form efficiency
  3. CStrong form efficiency
  4. DAllocative inefficiency of the market

Explanation

Serial correlation tests use only past price data. Zero correlation means past prices carry no predictive information, which is the weak form test. Semi-strong and strong forms need tests using public or private information, so they are not directly addressed.

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