CFA Practice Question

There are 275 practice questions for this study session.

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?

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

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.
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