Question An Analyst with ABC investment has developed a stock selection model based on earnings announcement made by companies with high P/E stock. the Model predicts that investing in companies with P/E ratio twice that of their industry average that make positive earnings announcements will generate significant excess return . If the analyst has consistently make superior risk- adjusted return on this strategy , Which form of the efficient market hypothesis has been violated? A, weak form only B, semi-strong and weak form only C, Strong, semi-strong and weak forms In my thought, if it breach weak form of EMH it will also breach semi-strong and strong , so i go with C but it is incorrect answer what do you think abt it ? many thanks
could someone tell my why B is correct answer
no no you have it the other way round! StromngEMH goes further than both SemiEMH adn WeakEMH. Equivalently, WeqakEMH is a subset of SemiEMH which is itself a subset of StrongEMH
Yes, from what I understand if the market is not weak form efficient, it cant be semi-strong or strong form efficient either. The answer options certainly dont make sense to me. The answer should be semi strong form (and strong by implication)
Penny’s right here. Weak is the lowest form of efficiency, Semi-strong then incorporates weak, and strong incorporates weak and semi strong.
andyrocks Wrote: ------------------------------------------------------- > Penny’s right here. Weak is the lowest form of > efficiency, Semi-strong then incorporates weak, > and strong incorporates weak and semi strong. Thats fine but if semi strong is violated, is it essential that weak will be violated too? I don’t think so. Here using P/E (fundamental analysis) you can get consistent abnormal returns so it violated semi strong. It has to violate strong too then right, because strong means abnormal returns cannot be earned using any analysis or data
You guys are getting too smart for your own good. 
You’re right - if semi-strong has been violated than by definition markets can’t be strong-form efficient. But I guess you have to think like a question writer on this one. The difference between strong and semi-strong is that with strong markets, even having material non-public information doesn’t give you an advantage, right? So they want you to identify that P/E ratios are not material non-public information, so you’re supposed to put strong form out of your mind. Hopefully there won’t be a question like this on the real exam.
morebeans Wrote: ------------------------------------------------------- > You guys are getting too smart for your own good. > You’re right - if semi-strong has been > violated than by definition markets can’t be > strong-form efficient. But I guess you have to > think like a question writer on this one. The > difference between strong and semi-strong is that > with strong markets, even having material > non-public information doesn’t give you an > advantage, right? So they want you to identify > that P/E ratios are not material non-public > information, so you’re supposed to put strong form > out of your mind. > > Hopefully there won’t be a question like this on > the real exam. thanks for the post morebeans(?) i was getting a bit anxious with this thread as it made me doubt more and more my basis for choosing B to start with - which i must now admit is the wrong choice whatever the question-writer is thinking!
sorry, just still dont get it… Why has the weak-form been violated? Weak-Form states that you cant earn excess return with Technical Analysis, but you can earn excess return by using fundamental analysis. So it only breaches the semi-strong form in my mind… can someone try and bring some light into the dark for me? Thx
Flok Wrote: ------------------------------------------------------- > sorry, just still dont get it… Why has the > weak-form been violated? Weak-Form states that you > cant earn excess return with Technical Analysis, > but you can earn excess return by using > fundamental analysis. So it only breaches the > semi-strong form in my mind… > > can someone try and bring some light into the dark > for me? Thx Semi-Strong includes weak form, so if semi-strong is violated, automatically weak form is violated. Weak - Cannot earn using technical Semi-Strong - cannot earn using technical and fundamental Strong - cannot earn using technical, fundamental, and material non public.
Flok Wrote: ------------------------------------------------------- > sorry, just still dont get it… Why has the > weak-form been violated? Weak-Form states that you > cant earn excess return with Technical Analysis, > but you can earn excess return by using > fundamental analysis. So it only breaches the > semi-strong form in my mind… > > can someone try and bring some light into the dark > for me? Thx what i think now is that the correct answer is that it breaches semis strong and strong only. in fact this option is not presented and following morebeans(?) i guess that this is b/c of the perspective of the question writer who wanted as to mark out what distinguishes weak from semi and strong… but in any case if the question is wrong the question is wrong and best leave it at that and hope they will be thought out better come saturday
it is question 89 exam 2 morning section in Practical 2 Schweser Total agree with Penny , just let it go good luck you guy on Saturday