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ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares

An investor analyses charts of past share prices of Kolt Co to predict future movements. If the market is weak form efficient, what is the implication for this approach?

Charting past prices cannot produce consistent abnormal returns in a weak form efficient market. Current prices already reflect all historical price information, so price changes follow a random walk and past patterns give no reliable guide to future movements.

  1. AIt cannot produce consistent abnormal returns, because past prices are already reflected in current pricesCorrect
  2. BIt will produce abnormal returns, because fundamental information is ignored by the market
  3. CIt can produce abnormal returns only if the investor also uses published accounts
  4. DIt is valid, because price patterns repeat in weak form efficient markets

Explanation

Weak form efficiency means current prices already reflect all past price information, so share prices follow a random walk. Chart analysis therefore cannot reliably beat the market. Option C describes fundamental analysis, which is tested by semi-strong efficiency, not weak form.

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