Equity Investments - Equity Investments Section 1
- Option : A
- Explanation : Trading rules that consistently generate abnormal risk-adjusted returns after trading costs contradict the weak form of market efficiency. Under weak form of market efficiency, securities fully reflect all past market data. This refers to all historical price and trading volume information forming the basis of technical analysis. Hence, past trading data is already reflected in current prices and returns cannot be generated by extrapolating price trends to forecast future price movements.
- Option : A
- Explanation : In an inefficient market, an active investment strategy outperforms passive investment strategy as several opportunities may exist to earn superior returns.
- Option : B
- Explanation : In a weak-form efficient market, active portfolio strategies based on fundamental analysis can be used to outperform passive portfolio strategies.
- Option : C
- Explanation : Taylor is acting as a technical analyst. He is using past prices and volume to predict future prices, which contradicts weak-form market efficiency.
- Option : C
- Explanation : Jacob is acting as a fundamental analyst by using publicly available information to estimate a security‟s intrinsic value to determine if the security is mispriced, which contradicts semi-strong form of market efficiency.
