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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Meera, an analyst in Pune, tests whether trading rules based on past price patterns of Nifty stocks earn abnormal returns. She finds that such chart-based rules earn no excess return after costs, but she has not tested whether company fundamentals or insider information can earn excess returns. Which form of the Efficient Market Hypothesis does her finding support?

Her finding supports the weak form of the Efficient Market Hypothesis. Weak form says current prices already reflect all past price and volume information, so chart-based rules cannot earn abnormal returns. Tests using public fundamentals or insider information would be needed for the semi-strong and strong forms.

  1. AWeak formCorrect
  2. BSemi-strong form
  3. CStrong form
  4. DNo form of efficiency, since fundamentals were not tested

Explanation

Weak form efficiency states that past price and volume data are already reflected in prices, so technical rules cannot earn abnormal returns. Her test uses only past prices, so it supports only the weak form. Semi-strong and strong forms need tests with public and private information, which were not done.

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