CS Executive · Corporate Accounting and Financial Management · Security Analysis
Technical analysts, who use charts of past prices to predict future movements, implicitly reject which form of market efficiency?
They reject the weak form. Weak form efficiency says past price and volume data are fully reflected in current prices, so charts cannot predict returns. Believing charts work therefore contradicts weak form efficiency, and consequently the stronger forms as well.
- AStrong form only
- BSemi-strong form only
- CWeak formCorrect
- DNone of the three forms
Explanation
Technical analysis assumes past prices carry predictive information. Weak form efficiency states that past prices are already reflected in current prices, so such patterns are useless. If weak form is rejected, the stricter semi-strong and strong forms are also rejected, but the minimum rejected form is weak.
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