Question

"In a momentum trading strategy, investors buy stocks that went up in the past 6 months and short sell stocks that went down during the past 6 month. Researchers have shown that this trading strategy is highly profitable and cannot be explained by risk adjustments. This suggests that the market is NOT ______ ."

	A.	strong-form efficient
	B.	semi-weak form efficient
	C.	semi-strong form efficient
	D.	weak-form efficient

"Consider the following trading strategy: Buy a stock if its price is 10% below its 200-day moving average, and sell it if its price is 10% above the 200-day moving average. If this trading strategy is highly profitable even after adjustment for risks, then the stock market is ________."

	A.	weak-form efficient
	B.	strong form efficient
	C.	semi-strong form efficient
	D.	inefficient

"Consider a trading strategy that buys low P/E stocks and short-sells high P/E stocks. If this strategy is highly profitable even after adjustment for risks, then it appears to contradict which form of efficient market hypothesis?"

	A.	the strong form
	B.	the semi-strong form
	C.	the weak form
	D.	the semi-weak form

Answer 1

1. The market is NOT weak-form efficient. Explaination: Please note that in a weak-form efficient market, the past data is always priced in the value of a stock and hence no trend/ technical analysis can work. However, in this case the investor seems to be generating a return from past trends. This means the market cannot be weak-form efficient.

2. The market is ineficient. Explaination: Please note that in weak-form efficient market, technical/ trend analysis dont work. In semi forms, fundamental also doesnt work and in fully efficient market, no analysis works. In case the technical analysis is giving profits after adjusting for risks, the market has to be inefficient.

3.This contradicts the strong-form of market hypothesis. Since P/E is a fundamental lever, the question is saying that fundamental analysis is working and generating profits after adjusting for risk. In strong-form of market efficiency, the fundamental analysis doesnt work. Hence, this seems to be contradicting the strong-form of market hypothesis

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