CS Executive · Corporate Accounting and Financial Management · Security Analysis
Which of the following, if proved true, would be a direct violation of the weak form of the Efficient Market Hypothesis?
A trading rule based on past price patterns that consistently earns abnormal risk-adjusted returns violates the weak form. Weak-form efficiency means past price and volume information is already reflected in prices, so technical analysis should not beat the market; insider gains concern only the strong form.
- AMutual fund managers using published balance sheets cannot beat the market
- BCorporate insiders earn abnormal returns from undisclosed information
- CA trading rule based on past price patterns consistently gives abnormal risk-adjusted returnsCorrect
- DShare prices change randomly on arrival of new information
Explanation
Weak form efficiency states that past prices and volumes contain no exploitable information. A rule using past price patterns that consistently earns abnormal returns contradicts this directly. Insider gains violate only the strong form, and the failure of fundamental analysis or random price changes are consistent with efficiency.
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