- CFA Exams
- CFA Exam: Level I 2021
- Study Session 12. Equity Investments (1)
- Reading 38. Market Efficiency
- Subject 1. The Concept of Market Efficiency

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**CFA Practice Question**

Serial correlation measures the relationship between the return on a security in the current period with the same security's return in a prior period. Which of the following patterns would indicate market inefficiency?

B. A zero correlation, which means that the directional price pattern will tend to continue.

C. A positive correlation, which means that the directional price pattern will tend to continue.

D. A positive correlation, which means that the directional price pattern will tend to reverse.

E. A zero correlation, which means that the directional price pattern will tend to reverse.

A. A negative correlation, which means that the directional price pattern will tend to continue.

B. A zero correlation, which means that the directional price pattern will tend to continue.

C. A positive correlation, which means that the directional price pattern will tend to continue.

D. A positive correlation, which means that the directional price pattern will tend to reverse.

E. A zero correlation, which means that the directional price pattern will tend to reverse.

Correct Answer: C

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**User Contributed Comments**
9

User |
Comment |
---|---|

virginia |
What does it means? |

Gina |
if markets were inefficient, you could predict future performance from past data. If the correlation were positive price patterns would move in the same direction. If it were negative, the directional price pattern would tend to reverse. |

surob |
Gina, good explanation. I guesses this question, but answered correctly. |

Shammel |
With a negative correlation, wouldn't you still be able to identify the price pattern? Therefore, negative correlation would indicate market inefficiency? |

charlie |
with negative correlation it will tend to reverse, not continue. So A is wrong. |

thekobe |
if there is market inefficiency: with negative correlation price pattern reverse with positive correlation price pattern continue so, the only anwser that fills one of these two conditions is C |

johntan1979 |
What about in an efficient market? Is the correlation zero? Or the opposite of inefficient market? -ve correlation price pattern continue +ve correlation price pattern reverse |

Shaan23 |
Johntan. Yes. 0 correlation - efficient --- no predicting power. |

Kiniry |
Even with weak form efficiency, technical analysis is useless. |