CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

A valid test of the weak form of the EMH should incorporate which of the following?

I. Only publicly available data
II. An estimate of all transactions costs
III. A risk adjustment of returns
A. I and II
B. II and III
C. I, II and III
Explanation: All three elements must be incorporated. The absence of each has been used to criticize research on the EMH. Some studies used information that was not available to investors at the time the historical data was evaluated. Many studies did not explicitly account for transaction costs, even though these would clearly reduce profits. Finally, risk adjustments must be made. As an example, consider a trading strategy that looks at percentage price breakouts as described in the text. Large percentage price breakouts are more likely to be found in lower-priced stocks. Many of these are riskier, smaller firms, so a test like this would be biased toward riskier stocks and should require a higher return just to match the market.

User Contributed Comments 9

User Comment
ReaClute I thought that tests using publicly available data other than trading data were tests of the semi-strong form, not the weak form.
garachen me too.. but it says 'only' public data, not 'all' public data.
murli True, if you don't chose only public data, then it means Weak form uses private information which is not true.
kuan it is better that they use the phrase all currently available info.
Semistrong form test use new and old public info
cheekywinky Weak form EMH relaters to historical prices and trends, not information, public or otherwise so I think B should be the correct answer
iceluke dont forget transaction costs
octavianus A clue was the word 'data' used for weak form as opposed to 'information' used for semi-strong form.
superjam good one octavianus
agenga i am abit confused about risk adjustment of returns
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