EMH

[cavil]

Which of the following statements about the assumptions of efficient capital markets and the conclusion of the efficient market hypothesis is LEAST accurate?
A) Tests of market efficiency have found no strategy that produces excess returns above the market after accounting for transaction costs.
B) If markets are efficient, investors should not trade often.
C) In testing for semistrong-form market efficiency, researchers typically adjust for the stock’s risk.
D) If markets are informationally efficient, the price will react quickly to new information.

 

[ditchdigger2CFA]

D.
The information will already be included in the price.

 

[chad17]

Yes, and isn’t that known as external efficiency?

 

[cavil]

Answer: A
Several strategies have been shown to produce abnormal returns (returns above the market after adjusting for risk). Small firms and firms with low price to earnings (P/E) ratios and high book-to-market values have all been found to produce positive abnormal returns.

 

[newsuper]

Yep, A

 

[busprof]

While the answer according to the curriculum is “A”, I’d argue that these factors (Size, P/B, etc…) are capturing risks that are not measured correctly in the CAPM approach. Otherwise, you’re getting a “Free lunch” - higher returns, same risk.
But, there’s always the right answer, the wrong answer, and the CFA answer. For the exam, use the CFA answer (in this case, it’s A).

 

[anajolie23]

Busprof, this is the best advice I have heard! I will stick to it!
Thank you