Choose the right answer.

1. You developed a new trading strategy that invests equally in stocks whose correlation with S&P 500 index is less than 0.1 (but greater than 0), and rebalances the portfolio monthly. You recognized that the trading strategy always earns returns higher than the 1-month T-bill rate. Does this violate the EMH?

(a) Yes, because the returns of the strategy are always higher than the T-bill rate.

(b) No, because the returns of the strategy are still risky.

2. As a research analyst, you found that the inflation rate this quarter predicts the S&P 500 index next quarter (i.e., the change in the S&P 500 index next quarter is partially explained by the change in the inflation rate this quarter). Is this inconsistent with the EMH?

(a) Yes, because the stock return can be forecasted by inflation

(b) No, because the stock return can only be partially explained by inflation.