Question

4) In an emerging market, a mutual fund uses technical analysis and has gained great profit. Suppose the US stock market is semi-strong efficient, will the mutual fund also profit in US market? Justify your answer with EMH.

Answer 1

As per the semi-strong model of EMH, neither technical analysis nor fundamental analysis can be used to earn excess returns. That is, earning an excess risk-adjusted return over the market return is not possible.

The mutual fund may have earned high returns in the emerging market because the market is possibly not semi-strong efficient. However, in the US market it may not be possible, since the US market is semi-strong efficient.

Therefore, in the US market, the fund may earn a profit, but not in excess of the market returns as this would be a violation of semi-strong EMH.