Question

Which of the following observations would provide evidence against the semi-strong form of the efficient market theory? Explain.

a. Mutual fund managers do not on average make superior returns.

b. You cannot make superior profits by buying (or selling) stocks after the announcement of an abnormal rise in dividends.

c. Low P/E stocks tend to have positive abnormal returns.

d. In any year approximately 50% of pension funds outperform the market.

Short answer

The correct answer is ‘c’.

Step-by-step solution

Definition

Efficient Market Hypothesis hypotheses that share prices reflect all the relevant information.

Explanation

Since Price-earnings ratio (P/E) that measures the share price of a company relative to its earnings is placed in public domain, so this observation would go against the semi strong form of the efficient market theory. Hence the correct answer is c.