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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Studies of Indian equities show that returns on a stock on one day have a correlation of almost zero with returns on the previous days. A trader therefore concludes that past price sequences cannot be used to earn consistent abnormal returns. Which form of the Efficient Market Hypothesis does this finding most directly support?

The finding supports weak form efficiency. If today's returns are uncorrelated with past returns, historical price patterns cannot generate consistent abnormal profits, which is exactly what the weak form claims. Semi-strong and strong forms concern public and private information, not past prices.

  1. AWeak formCorrect
  2. BSemi-strong form
  3. CStrong form
  4. DMarginal form

Explanation

Zero serial correlation in returns means historical price data carry no exploitable information. That is the testable implication of the weak form. Semi-strong and strong forms need tests using public announcements and insider information respectively, which are not involved here.

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