Question

1. What is incorrect about anomaly?

   		Neglected firm effect is related to semi efficient market hypothesis
   		Small firm effect is that small firms have relatively superior risk adjusted returns to large firms
   		January effect can be explained by weak form efficient market hypothesis
   		a financial anomaly refers to results which cannot be explained by financial theories especially efficient market hypothesis

2. Which of the following is wrong about the strong form of the Efficient Market Hypothesis?

		The strong form of the Efficient Market Hypothesis states that security prices fully reflect all public and private information
		Inside information is information not available to the general public
		Strong legal enforcement can make a market perfectly efficient as the strong form of the Efficient Market Hypothesis states.
		This means even corporate insiders cannot make abnormal profits by using inside information

Answer 1

1

option 1 : neglected firm effect is that lesser followed lesser known firms tend to have out performance over the rest. this is compliant with weak form of the theory where out performance is possible due to fundamental analysis; hence option is incorrect

option 2: This is a well known and proven statistically fact; so correct

option 3:January effect is a seasonality effect due to depressed prices in Dec when investors tend to perform tax loss harvesting. Therefore in Jan investors tend to buy relatively lower priced stocks. This is in sync with weak form of theory as in the strong form over performance will be non-existent

option 4: correct as the name of anomaly indicates

2: Strong form states that all information - public and private are fully reflected in stock prices. Hence option 1 is true; Option 2 is also true - inside info is available only to the insiders and not to the public option 4 is also true as per definition of strong form of efficient market hypothesis; option 3 is false - there is no impact of legal enforcement on the theory;