Question

A person is able to earn superior returns from watching “High Flyers” on Bloomberg on a regular basis. With respect to the efficient market hypothesis (EMH), this

            (a)       Is consistent with the semi-strong form

            (b)       Violates the semi-strong form                                                                       

            (c)       Violates the weak form                                             

            (d)       Is consistent with all forms

Which item indicates a flaw in the efficient market hypothesis?

(a)       Market indexes drop when GDP falls                                   

(b)       Insiders can’t earn excess returns

(c)       Inflation fears increase interest rates                         

(d)       A bubble in asset prices         

Answer 1

Weak form markets reflects past trading information into stock prices. If excess returns are earned based on trading information then:

            (c)       Violates the weak form                                             

Second part:

(d)       A bubble in asset prices