Skip to content

CA Final · Advanced Financial Management · Security Analysis

A trader in Mumbai studies 10 years of daily closing prices of a mid-cap stock and develops rules based on past price patterns, but finds that these rules fail to earn abnormal returns after transaction costs. Which form of the Efficient Market Hypothesis is directly supported by this finding?

The finding supports the weak form of EMH. Weak form holds that prices already reflect all historical price and volume information, so rules built on past price patterns cannot generate abnormal returns. Tests on public announcements or insider data would be needed for semi-strong or strong form.

  1. AWeak formCorrect
  2. BSemi-strong form
  3. CStrong form
  4. DPerfect-market form only in the sense of zero information cost

Explanation

Weak form EMH says current prices already reflect all past price and volume data, so technical analysis cannot earn abnormal returns. The test here uses only historical prices, so it supports weak form. Semi-strong would require testing public information such as announcements, and strong form would require testing insider information.

Did you get it right without looking?

One question tells you little. A timed set on Security Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Security AnalysisFree diagnostic mock

More Security Analysis questions