Chapter 14, Problem 10CQ

Efficient Market Hypothesis For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the market is weak form but not semistrong form efficient, (3) the market is semistrong form but not strong form efficient, and (4) the market is strong form efficient.

1. a. The stock price has risen steadily each day for the past 30 days.
2. b. The financial statements for a company were released three days ago, and you believe you’ve uncovered some anomalies in the company’s inventory and cost control reporting techniques that arc causing the firm’s true liquidity strength to be understated.
3. c. You observe that the senior management of a company has been buying a lot of the company's stock on the open market over the past week.

Use the following information for the next two questions:

Technical analysis is a controversial investment practice. Technical analysis covers a wide array of techniques, which arc all used in an attempt to predict the direction of a particular stock or the market. Technical analysts look at two major types of information: Historical stock prices and investor sentiment. A technical analyst would argue these two information sets provide information about the future direction of a particular stock or the market as a whole.