Can anyone explain this question please : “If a market is weak-form efficient, but semi-strong-form inefficient, then which of the following types of portfolio management is m_o_st likely to produce abnormal return?” Answer: Active with fundamental analysis (not with technical nor passive) Actually I’m not interested in the answer itself, as much as in understanding what does it mean to have a market that is weak-form efficient, but semi-strong-form inefficient? It sounded for me like if we’d like to rank the forms descending it will look like as follows; but then how come would one encompass the later!! 1) strong-form efficient
not efficient at all, 2) weak-form efficient, 3) semi-strong form efficient, 4) strong-form efficient.
In case of weak-form efficient market, securities prices reflect only past market data. In case of semi-strong form efficient market, securities prices reflect past market data and available public information. In case of strong-form efficient market, securities prices reflect past market data, available public information and private information.
By definition, strong-form market efficiency means that market is efficient in semi-strong and weak-form “levels” as well. In the problem you copied here, securities prices reflect only past market data. Hence, an investor can leverage on public and private information to generate risk-adjusted abnormal returns after transactions costs.
Imagine 3 level of efficiency: weak-form, semi-strong form, strong-form. If market is efficient in certain “level”, then it is efficient in “lower levels” as well. For example, had it said semi-strong efficient and strong-form inefficient, you should conclude that market is weak-form efficient, semi-strong efficient, but strong-form inefficient. In your problem, market is weak-form efficient, semi-strong inefficient, strong-form inefficient.
Why the problem says one form where market is efficient, and another form where market is inefficient? To show you the “level”, below which market is efficient. After that you may identify what information is reflected in securities prices.
correct 4. correct 5. correct. Market maybe efficient either semi-strong form or weak-form. That’s why they indicated two adjacent “levels” in the problem to show you “where ends efficiency and where starts inefficiency”.
I wouldn’t say so because I don’t remember curriculum writing like that. Usually it also shows whether market is inefficient in “one level up”.
When curriculum says weak-form efficient and semi-strong form inefficient, means market is efficient weak-form, and inefficient semi-strong form and beyond (strong form inefficient).
Semi-strong form efficient => weak-form efficient. But you don’t know whether market is strong-form efficient as well or not.