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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

An investor claims that a trading rule based on the Nifty's previous-day movement gave 14% a year before transaction costs, against a buy-and-hold return of 11%. The rule requires 250 round trips a year at a cost of 0.02% per round trip. Assuming returns and costs simply add and subtract, what is the rule's net annual return and the conclusion consistent with market efficiency?

The net return is 9%, below the 11% buy-and-hold return. Costs of 250 trips at 0.02% total 5%, which wipes out the apparent gain, so the result is consistent with weak form efficiency because no net abnormal return remains.

  1. A9%, the rule earns no net advantage over buy-and-hold, consistent with efficiencyCorrect
  2. B14%, the rule beats the market and efficiency is rejected
  3. C12%, the rule beats buy-and-hold slightly, so efficiency is rejected
  4. D9%, the rule beats buy-and-hold so weak form is rejected

Explanation

Total cost = 250 x 0.02% = 5% a year. Net return = 14% - 5% = 9%, below the buy-and-hold 11%. After costs the rule has no advantage, so the evidence is consistent with weak form efficiency. Options that ignore or misstate costs reach the wrong conclusion.

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