A Schweser question I ran across a while back companies, only, investing, positive, developed

Foufou

An analyst has developed a stock selection model based on earnings announcements made by companies with high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk adjusted returns using this strategy, which form of EMH has been violated?

A. Weak form only.
B. Semi-strong and weak form only.
C. Strong, semi strong, weak.



Now, I got this answer correct (which is B) simply through process of elimination. The question didn't mention anything about historic prices (aka Technical Analysis) nor did it mention inside information. But it clearly did talk about excess returns based on publicly available information (i.e. P/E) which clearly is talking about the semi strong.

What I don't understand is why in this scenario the weak form has been violated ("semi strong AND weak form only). Can't the markets be weak form efficient while not being semi strong efficient as in the above example?



Edited 1 time(s). Last edit at Thursday, January 13, 2011 at 01:31PM by tj2001.

Siddimaula

shurka1980 Wrote:
-------------------------------------------------------
> From what I understand semi-strong form includes
> weak form. So, if semi-strong is violated we can
> automatically conclude that weak form is also
> violated. The order of inclusion is:
> weak form < semi-strong < strong.


This is what I initially thought too, but then I take a look at the inclusion heirarchy... if strong form is violate, via the use of non-public information, then shouldn't that violate semi and weak as well? There is powerful evidence out there against strong form EMH.

farrukhsadiq

From what I understand semi-strong form includes weak form. So, if semi-strong is violated we can automatically conclude that weak form is also violated. The order of inclusion is:
weak form < semi-strong < strong.