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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Mehta Securities studies the share of Kaveri Auto, whose price series shows no statistically significant serial correlation between successive daily returns. Traders who rely on charts of past prices have earned no abnormal return after costs. Which form of market efficiency is directly supported by this evidence?

The evidence supports weak form efficiency. Zero serial correlation and no profit from chart patterns show that past price information is already reflected in current prices. Tests of public announcements or insider information would be needed to support semi-strong or strong form efficiency.

  1. AWeak form efficiencyCorrect
  2. BSemi-strong form efficiency
  3. CStrong form efficiency
  4. DInefficiency in all forms

Explanation

Weak form efficiency says current prices already reflect all past price and volume data, so technical analysis cannot generate abnormal returns. Absence of serial correlation and chart profits tests exactly this. Semi-strong and strong forms need tests on public and private information, which are not provided here.

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