Question

Question 3 (RWJJ Ch13, Q5) A stock market analyst is able to identify mispriced stocks by comparing the average price for the past 10 days to the average price for the last 60 days. If this is true, what do you know about the market?

Here's question and answer. Could u explain why it's not weak form efficient? I saw it was past information and should be weak form.

Answer 1

Solution:-

Weak form EMH overview:

In simplest of words, weak form efficient market hypothesis states that there is no relationship between the past information and current stock price or the future movement of the stock price.

Elaborating above, it states that the current price of a security has no relation to past events or information and that past earnings, past prices etc hold no influence over where the stock price stands today and where it may go in future.

In other words, current stock prices reflect solely the current information and variables, with no relationship with the past events or prices.

Analysis of given scenario:-

In the given situation, the analyst is able to find mispriced stocks by comparing last 10-day average price to last 60-day average price. If this is true, it means that the recent price levels (10-day average) are being influenced (i.e. holds a relationship with) by past price levels (60-day average). This scenario is opposite to the underlying conditions of weak form efficient market hypothesis which states that the current prices are not influenced by any past events, prices or information.

That's why in the given case, we can conclude that the market is NOT weak form efficient.