Question

Suppose that, after conducting an analysis of past stock prices, you came up with the observations below. Which observation would appear to contradict the weak form of the efficient market hypothesis?

      a.   A stock’s average return is significantly higher than the risk-free rate of return.

      b.   The correlation between the return this week and the return next week is a statistically significant −0.40.

      c.   The correlation of one stock’s return with another stock’s return is a statistically significant +0.30.

      d.   One could have made higher-than-average capital gains by holding shares with low dividend yields.

      e.   Prices react instantaneously and without bias to new information.

Answer 1

One cannot make higher than average capital gains by holding shares with low dividend yields because this is not the the reflection of a weak efficient form of market because it is already reflective of all such information and this deficiency cannot be found in a weak Efficient market. One can never make higher rate of return in a weak Efficient market.

Best of the statements are true reflection of weak efficient form of market.

Correct answer is option (D)