Question

Which is of the following provides evidence of an efficient market or not. Briefly explain your answers. To which form of efficient market are your referring in each: weak form, semi-strong, strong?

a. Active mutual funds outperforming passive ones after adjusting for risk and expenses.

b. Momentum in stock prices over 12 months

c. At the announcement of a positive earnings surprise, the price of stocks jump and continue to rise for a month with no new news.

Answer 1

There are briefly three forms of efficient market hypothesis weak form, Semi-strong form and strong form. Weak form states that market price reflects all the past information so technical analysis can not be effectively utilized. Semi-strong form indicates since all the information is available in the stock then the fundamental analyst or technical analysis can not be used to gain consistent high returns above the market and Strong form indicate even people with insider information can not benefit from the information.

· Active mutual funds outperforming passive ones after adjusting for risk and expenses is an example of weak form of efficient market hypothesis where they use fundamental analysis to generate excess returns.

Momentum in a stock price is considered to be an anomaly, similarly price rise after a positive earnings surprise continuously without any news is a market anomaly.