Weak-Form Efficient markets

CFA Level I Equities
#1

Hello friends,

This is my first time posting a query on this forum, so aologise for any mistake.

Q: If a market is weak-form efficient…

A. The return of a passively managed portfolio is likely to be higher than the return on actively managed portfolio.

B. The return of a passively managed portfolio is likely to be lower than the return on actively managed portfolio.

C. The return of a passively managed portfolio is likely to be same as the return on actively managed portfolio.

Ans. B

However, I am thinking that in a weak form efficient, excess return are not possible so passively managed portfolio will likely to be similar or higher because of all the expertise and management skills.

The only way I can agree with B is if management fees and transaction cost is considered and that brings the returns lower.

Please clarify.

Thanks

#2

In weak-form efficiency, long-run, positive, risk-adjusted returns are not possible using historical price and volume data; i.e., technical analysis is useless. However, it’s possible that fundamental anlysis is useful. Hence, B.

#3

In general in all forms except for the strong form EMH excess returs are possible, either through fundamental analysis (weak form EMH) or through private insider information (semi-strong form EMH).

Only in the strong form EMH no excess return should be possible on average(!) since all information is available to all market participants.

Best, Oscar

#4

Thanks Mr Magician.

#5

My pleasure.