Question

When discussing the empirical tests of the EMH, there are three topical areas that suggest that the debate probably will never be settled: the magnitude issue, the selection bias issue, and the lucky event issue. Specifically with the lucky event issue, the laws of probability are oftentimes ignored or forgotten.

True

False

Answer 1

Answer is True.

The above statement is true beacuse the three issues i.e. the magnitude issue, the selection bias issue and lucky event issue suggests that the debate over EMH will never be settled.

The three issues are discussed below:

• The magnitude issue: Portfolio managers play a vital role in generating the investment profits. However, these profits are hard to validate due to standard deviations associated with well diversified portfolio.
• The selection bias issues: this suggests that the techniques managers used to generate profits is not revealed, thus it cannot be statistically validated.
• The lucky event issue: There is a probability of superior profits, but it will be repeated in another period is a question which highlights that the law of probability are often ignored or forgotten.

Thus, all these issues suggests that debate over EMH will never be settled.