1.Which of the following observations would appear to violate the weak form of EMH? Semi- strong form? Strong form? Please explain.

a) The average rate of return is significantly greater than zero.

b) The correlation between the return during a given week and the return during the following week is zero.

c) One could have made superior return by buying stock after a 10% rise in price and selling after a 10% fall.

d) One could have made higher-than-average capital gains by buying those stocks with low dividend yields (i.e., dividend/price, and information regarding dividends is normally disclosed in the annual reports).

e) Some fund managers at big investment banks are able to obtain information regarding quarterly earnings from corporate executives before the corporates announce their earnings to the public. As such, they are able to make early trading and generate superior investment performance.

Question 2

Which of the following phenomena would be either consistent with or a violation of the efficient market hypothesis? Explain why?

a. nearly half of all professionally managed mutual funds are able to outperform the S&P500 in a typical year.

b. Money managers that outperform the market (on a risk-adjusted basis, i.e., earning positive alphas) in one year are likely to outperform in the following year.

c. Stock prices tend to be predictably more volatile in January than in other months.

d. Stock prices of companies that announce increased earnings in January tend to outperform the market in February.

e. Stocks that perform well in one week perform poorly in the next week.