Question

You discover you can make above normal returns if you buy oil-company stocks just before noon on any given trading day and then sell them immediately before the market closes that same day. Which of the following describes this event?

Multiple Choice

• This would not be a violation of market efficiency.

• This would be a violation of semi-strong form efficiency.

• This would be a violation of strong form efficiency.

• This would be a violation of all forms of market efficiency.

• This would be a violation of weak form efficiency.

Answer 1

The answer will be the last option – “This would be a violation of weak form efficiency”.

Explanation: Weak-form efficiency holds when there is no serial correlation in historical return on a security. Another test for weak-form efficiency is to look at trading rules arrived at using technical analysis.

Here the very fact that you can make above normal returns if you buy oil-company stocks just before noon on any given trading day and then sell them immediately before the market closes that same day is violating the weak form efficiency.