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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

An analyst at a Mumbai brokerage tests whether past price changes of a listed stock help predict future price changes. She finds that the serial correlation of daily returns is statistically indistinguishable from zero, so trading rules built on past prices earn no excess return after costs. Which form of the Efficient Market Hypothesis does this finding support?

The finding supports weak form efficiency. Weak form holds that prices already reflect all past price and volume data, so past returns cannot predict future returns and technical trading rules earn no abnormal profit. Semi-strong and strong forms concern public and private information, which this test did not examine.

  1. AWeak formCorrect
  2. BSemi-strong form
  3. CStrong form
  4. DNo form of efficiency, since returns are random

Explanation

Weak form efficiency says current prices already reflect all past price and volume information, so technical analysis cannot earn abnormal returns. Zero serial correlation and useless price-based rules are exactly this test. Semi-strong would require testing public announcements, and strong form would require testing insider information.

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