- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 3. Market Efficiency
- Subject 4. Behavioral Finance
CFA Practice Question
One method of testing the weak form of the EMH involves statistical tests of independence. Which of the following is not an example of this approach?
B. Applying a runs test to price changes
C. Testing whether past stock returns can reliably forecast future stock returns
D. Testing whether investors exhibit "herd mentality" or the tendency to gravitate toward stocks with increasing volume
A. Testing for serial correlation in historical stock returns
B. Applying a runs test to price changes
C. Testing whether past stock returns can reliably forecast future stock returns
D. Testing whether investors exhibit "herd mentality" or the tendency to gravitate toward stocks with increasing volume
Correct Answer: D
The presence of runs and autocorrelation implies that past returns can predict future returns; thus the first three examples are all part of the statistical tests category. The last answer looks at trading rules based on market behavior and thus is testing the weak form, but not with statistical tests on returns.
User Contributed Comments 4
| User | Comment |
|---|---|
| accounting | D is the odd one out |
| rethan | The question asks for statistical tests. Answer D is, i guess, behavioral |
| Shammel | Answer D is a trading rule testing weak-form EMH. The other three were the statistical tests testing weak-form EMH. |
| johntan1979 | Agree with Shammel. Trading rule vs stat test, as explained in the answer. |