CA Final · Advanced Financial Management · Security Analysis
Which of the following findings would be regarded as an anomaly challenging the semi-strong form of the Efficient Market Hypothesis?
Small-cap stocks consistently earning higher risk-adjusted returns is the anomaly that challenges semi-strong efficiency, because the strategy uses only public information, market capitalisation, yet earns abnormal returns. The other findings are consistent with weak or semi-strong efficiency rather than contradicting it.
- ASmall-cap stocks consistently earning higher risk-adjusted returns than large-cap stocks, based on publicly known market capitalisationCorrect
- BStock prices following a random walk with successive price changes being independent
- CTechnical analysts failing to beat a buy-and-hold strategy after costs
- DPrices reacting instantly and fully to a surprise dividend announcement
Explanation
A persistent size effect uses public information (market capitalisation) to earn abnormal risk-adjusted returns, which contradicts semi-strong efficiency. Random walk and failure of technical analysis support weak form efficiency. Instant adjustment to a dividend surprise supports semi-strong efficiency.
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