Question

On 30 th June 2020, Attock Petroleum Limited published their annual earnings report which
resulted in an increased stock price. On 1 st July, 2020, Mr Saeed an investor earned abnormal
profits while beating the other traders in the market. Considering that financial markets were
weak form efficient, in your opinion, according to Efficient Market Hypothesis; if no investor can
beat the market or create an arbitrage then how Mr Saeed did it?

Justify your answer.

Answer 1

If the financial market are weak form efficient,it will mean that it is discounting all the historical information and the past trends so current market price is not reflective of the future market price and hence Excess Return cannot be made by looking at the historical price.

Technical analysis would not be working in this kind of market because they do not have any regular Trend and only a superior level of fundamental analysis can be helpful in order to maximize the return and hence it can be said that the superior fundamental analysis can be helpful in weak form Efficient market in order to maximize the return by beating the market.

In this case, it can be seen that Mr Saaed has beaten the market in weak form Efficient market, so it can be assumed that he has adopted a superior fundamental analysis which has helped him in order to beat the market because technical analysis or other arbitraging does not work in weak form efficient so only better technology analysis will be helpful in making any excess rate of return.

One another reason for beating the market rate of return could be he has got any insider information which are not discounted into the share price and which is not discounted in week for efficient because private information can only be discounted into the strong form efficient market and hence he may be an insider in order to make any excess rate of return.