Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?
A) The average rate of return is significantly greater than zero.
B) The correlation between the market return one week and the return the following week is zero.
C) You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
D) You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

Question

Quizplus · Accepted Answer

The weak form of the efficient market hypothesis implies that past price and volume data cannot be used to consistently generate superior returns. Choice C suggests that it is possible to make superior returns by using a simple trading strategy based on past price movements, which contradicts the weak form of the hypothesis. Options A, B, and D do not necessarily contradict the weak form of the efficient market hypothesis. A positive average rate of return could still be consistent with an efficient market if it reflects compensation for risk. Zero correlation between weekly market returns may be consistent with an efficient market if there is no predictable pattern in returns. Superior returns based on a new forecasting methodology would suggest that the market was not fully incorporating all available information, but it would not necessarily contradict the weak form of the efficient market hypothesis.

Which of the Following Stock Price Observations Would Appear to Contradict