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IAI Actuarial Core Principles · Business Finance · Key principles of finance

Which of the following findings would be most inconsistent with the weak form of market efficiency?

A simple rule based on past price moves earning significant abnormal returns after costs year after year would contradict weak form efficiency, since that form says historical price information is already in prices and cannot be used for consistent excess returns.

  1. AShare returns on successive days show negligible correlation
  2. BA simple rule based on past price moves gives investors significant abnormal returns after costs year after yearCorrect
  3. CFund managers on average fail to beat the index after fees
  4. DShare prices react quickly on the day of a results announcement
  5. Price changes appear to follow a random walk

Explanation

Weak form states that past price and volume data are already reflected in prices, so rules based on them should not give persistent abnormal returns after costs. Persistent success of such a rule contradicts it. Uncorrelated returns and random-walk behaviour support weak form, and quick reaction to announcements and poor active fund performance relate to semi-strong efficiency and are consistent with it.

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