The question states: “An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by companies with high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk adjusted returns using this strategy, which form of EMH has been violated?” A. Weak form only. B. Semi-strong and weak form only. C. Strong, semi strong, weak. The answer states B, but I believe it should be C for the following reasons: For strong form: 1. no investor should earn consistent abnormal returns. the question clearly states consistent returns. 2. TA and FA is of no value in strong form, since all information is included in price 3. Prices adjust rapidly in strong form as well, prices are clearly not adjusting rapidly to reflect the information announcements if the investor can earn these returns. Also, how can the strong form be valid, yet weak and semi-strong be violated? that makes no logical sense, since each form of EMH builds on the previous. Schweser says the following: “B Semi strong form of EMH states that security prices rapidly reflect all publicly available information. If the analyst can use his model, which is based on publicly available information, to earn above average returns, the semi strong form of EMH has been violated.” Does that not imply strong form is violated as well? or cannot hold?
“Also, how can the strong form be valid, yet weak and semi-strong be violated? that makes no logical sense, since each form of EMH builds on the previous” You logic is messed here. Strong form EMH is a, uh, stronger condition than the others. In fact, it would be hard to find someone who says that markets are efficient in that you can’t make excess returns from non-public information. Since all that stuff about P/E’s and earnings surprises is public, answer B is correct.
It’s B. There no talk about insider information here, only public data. Since this info can be used to generate excess returns, semi strong form EMH is violated, which by default means that weak-from is also violated.