Which of the following would be a violation of weak form efficiency? Transportation compans' share price...
Which of the following would be a violation of weak form efficiency?
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Transportation compans' share price drops after a sudden rise in oil prices. |
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Companies with higher beta earn higher returns. |
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Insiders are unable to earn abnormal returns by trading in their company's stock. |
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Returns on Fridays are higher than returns on Mondays, on average. |
Homework Answers
The Weak form of efficiency states that the past movements in the price of a Security have no bearing on the future price movements and can't be used to predict the future directions. If the second option - "Companies with higher beta earn higher returns" was true, that would be in direct contrast to the weak form of efficiency. The beta of a Security is the relative volatility, which is calculated from the past movements of the price of that security, w.r.t the overall market prices. If the companies with higher Beta earn higher returns in the future, that means the past prices do have an effect on future prices. Hence Statement 2 is a violation of the Weak Form of Efficiency.
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