Week 11 - Weak-form Efficiency

Question 1

Define weak-form efficiency

Answer 1

Weak-form efficiency would exist if it were impossible to make abnormal profits by relying on past security price movements or technical rules to indicate when to buy and sell

Question 2

What is the simple definition of weak-form efficiency?

Answer 2

You cannot gain an advantage or earn abnormal (above-average) profits by analysing past price patterns or using technical analysis (like moving averages, chart patterns, etc.) to decide when to buy or sell.

Question 3

What is the price like in weak-form efficiency?

Answer 3

The current price already contains all information from past price movements

Question 4

Which markets are weak-form efficient?

Answer 4

The world’s leading markets - LSE, NYSE

Question 5

How can you test if a market is weak-form efficient?

Answer 5

Test whether there is a unit root in the price data

Question 6

Empirical evidence shows that share prices follow a random walk - what does this mean?

Answer 6

It is impossible to correctly predict share price movement using historical data of share prices (but you may be able to predict returns

Question 7

Can you predict price movements?

Answer 7

Not if the market is weak-form efficient

Question 8

Can you predict price returns?

Answer 8

Potentially