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Question 8-12I

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Essentials Of Investments
Found in: Page 259
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? Explain.

a. The average rate of return is significantly greater than zero.

b. The correlation between the return during a given week and the return during the following week is zero.

c. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

d. One could have made higher-than-average capital gains by holding stocks with low dividend yields.

The correct answer is ‘c’.

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Step by Step Solution

Definition

A direct implication of the Efficient Market Hypothesis is that consistently beating the market on a risk adjusted basis would be less likely as market prices should react only to the new information.

Explanation

Since, according to the weak form of Efficient Market Hypothesis, beating of the market by investor is not possible. Hence the correct answer is c

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