Which of the following contradicts the proposition that the stock market is weakly efficient?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Weak-form market efficiency states that current asset prices fully reflect all information contained in past trading data (past prices, returns, volumes). If the market is weak-form efficient, no trading rule based only on historical price patterns or calendar effects can generate consistent abnormal returns.

Step-by-step reasoning:
1. Start from the definition: weak form ⇒ past price/volume data provide no usable information to earn abnormal profits systematically.
2. If a pattern like “every January the stock market earns above-normal returns” exists, traders could exploit that calendar pattern (known from historical data) to buy before January and earn predictable excess returns. That means past price/time patterns would allow consistent abnormal profits.
3. Therefore the existence of a reliable January effect directly contradicts weak-form efficiency because it uses historical/calendar regularities to predict returns.

Why the correct answer is c:
- Option c asserts a persistent, predictable seasonal excess return based on past calendars; that is exactly the kind of predictable pattern weak-form efficiency denies. So c contradicts weak-form efficiency.

Why the other options are incorrect:
- a (Over 25% of mutual funds outperform the market on average): This could occur by chance, skill, or selection biases, and it does not necessarily imply past-price predictability. Mutual funds may use other information; this primarily challenges performance persistence or semi-strong/active management claims, not weak-form EMH directly.
- b (Insiders earn abnormal trading profits): Insider trading uses private, nonpublic information. That violates strong-form efficiency (which says even private info is reflected), but not the weak form (which only concerns past public price data).
- d (Applications of technical trading rules fail to earn abnormal returns): This statement supports weak-form efficiency (it says past-price-based rules do not earn excess returns), so it does not contradict it.

Conclusion: Option c is the contradiction to weak-form efficiency; this matches the provided answer.

Which of the following contradicts the proposition that the stock market is weakly efficient?[Fill in the blank]Single choice

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