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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

An investor, Meera, tracks a fund over 100 independent years in which the market is semi-strong efficient. The fund manager uses only published annual reports to pick stocks, and the fund's alpha is measured after transaction costs. What is the expected alpha of this fund?

Expected alpha is negative. Since annual reports are public, a semi-strong efficient market already reflects them, so the fund earns no gross abnormal return. Trading and management costs still have to be paid, so net alpha falls below zero.

  1. APositive, because published reports contain valuable information
  2. BNegative, because the fund earns zero before costs and incurs costsCorrect
  3. CZero, because costs are irrelevant in efficient markets
  4. DPositive, because fundamental analysis beats technical analysis in the semi-strong form

Explanation

In a semi-strong efficient market, published reports are already reflected in prices, so gross abnormal return is zero. Transaction and management costs then reduce net return below the risk-adjusted benchmark, giving negative alpha. Costs are real and are not neutralised by efficiency.

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