CMA Final · Strategic Financial Management · Efficient Market Hypothesis
Which of the following is an anomaly commonly cited as evidence against the semi-strong form of the Efficient Market Hypothesis?
The small-firm or size effect is a recognised anomaly against semi-strong efficiency. Because market capitalisation is public information, consistently higher risk-adjusted returns for small-cap stocks suggest prices do not fully reflect public data. The other options describe outcomes that are consistent with efficient markets.
- ASmall-firm (size) effect, where small-cap stocks earn higher risk-adjusted returns than large-cap stocksCorrect
- BZero autocorrelation in daily stock returns
- CImmediate price adjustment to a dividend announcement
- DFailure of chart patterns to generate profits after costs
Explanation
The size effect uses public information (market capitalisation) to earn abnormal returns, challenging semi-strong efficiency. The other options are results consistent with weak or semi-strong efficiency rather than anomalies.
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