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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

An analyst studies Indian large-cap stocks and finds that buying the shares that rose most in the previous six months earns no abnormal return after adjusting for risk and transaction costs. Which form of market efficiency is this finding at least consistent with?

The finding is consistent with weak-form efficiency, because a strategy built only on past price movements fails to earn abnormal returns after adjusting for risk and costs. This shows historical prices are already reflected in current prices, which is exactly what the weak form states.

  1. AWeak formCorrect
  2. BSemi-strong form only, and not weak form
  3. CStrong form only, and not weak form
  4. DNone of the forms of efficiency

Explanation

Momentum rules use only past price data. If they earn no abnormal return, past prices are already reflected in current prices, which is the weak form. The other options wrongly claim that weak form does not hold, yet the evidence is a direct test of it.

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