Which form of inefficiency?

CFA Level III
#1

If there is returns to be obtained by buying winning stocks and selling losing stocks , which form of inefficiency is being violated :

  1. Weak-Form

  2. Semi-Strong Form

  3. Strong form .

#2

Weak form. Past results are used to make future returns.

#3

Then agains isnt it suppose to be weak/semi/strong form EFicient ?

#4

Weak form says that market data are included in the price: it violates weak form.

Semi-strong form says that public information (e.g., fundamentals) are included in the price: it doesn’t violate semi-strong form.

Strong form says all information is included in the price: it doesn’t violate strong form.

#5

Weak-Form should be right .

Past price patterns should not give clues about future prices .

So no systematic returns should be earned by analyzing past prices

#6

It violates all of thems people. No strong without weak. Darwin biches

#7

Why would sem-strong form not be violated? Why are we assuming that it is a winning stock based on historic data… could it not be a winning stock based on fundamentals?

Sorry… I’m a bit confused

#8

winning stock means it beat others in appreciation. whether it was based on fundamentals or technicals or something else is your interpretation . you’re picking the stock only because it outperformed recently .

if the stock did not outperform recently , but you bought it because of its fundamentals , and it subsequently outperformed , kudos to you , you found something many others didn’t .

but in this case it was well known based on recent price appreciation. we’re talking about the general class of stocks that have ex-ante outperformed on price , not the particular class which outperformed and were fundamentally good stocks.

#9

Weak form - technical analysis is useless, but fundamental analysis generates alpha.

Semi-strong - technical analysis AND fundamental analysis are useless. Only insider information generates alpha.

Stong - All information is useles–technical, fundamental, and insider. There is no knowledge that is known or knowable that can ever generate alpha.

Remember–if the market is Strong-form efficient, then it is also Semi-strong and weak-form efficient as well.

The question (as I read it here) does not say how the analysis is conducted. So it’s difficult to answer the question. If we knew whether the analyst used fundamental or technical analysis, we would be able to drill down further.

We can say for certain, however, that the Strong-form is violated, because alpha has been generated. (And strong-form efficiency says that you can never ever ever ever ever generate alpha.)

#10

Guys,

He is using market info (winners vs losers). This is a momentum strategy and is based on technical analysis.

As such, all forms of efficiencies are violated because you cannot violate weak-form without defacto violating the higher orders of efficiency.

#11

.

#12

Very good analysis.

I agree strong-form is definitly violated.