Three claims and the efficient markets hypothesis
Paper A style · Utility · Straightforward · 8 marksThree employees of Harrowgate Asset Management make the following claims about shares listed on the London Stock Exchange.
- Claim 1 (a technical analyst): "By studying charts of past share prices and trading volumes I can identify patterns that earn returns above those justified by risk."
- Claim 2 (a fundamental analyst): "By reading company results and broker reports the moment they are published, I can pick shares that beat the market after allowing for risk."
- Claim 3 (a director): "Because I sit on the board of a company in takeover talks that have not yet been announced, I could make abnormal profits by trading its shares."
- (i)3 marks
Describe the weak, semi-strong and strong forms of the Efficient Markets Hypothesis.
- (ii)3 marks
For each claim, state the weakest form of the hypothesis which, if it held, would mean the claim is false. Give a brief reason in each case.
- (iii)2 marks
Explain one consequence for an investment manager if the semi-strong form holds.