Question

Note whether the following phenomena would be consistent with or a violation of the efficient market hypothesis.

A. Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year.
B. Money managers that outperform the market (on a risk-adjusted basis) in one year are likely tooutperform in the following year.
C. Stock prices tend to be predicatbly more volatile in January than in other months.
D. Stock prices of companies that announce increased earnings in January tend to outperform the market in February.
E. Stocks that perform well in one week perorm poorly in the following week.

Answer 1

D) Stock prices of companies that announce increased earning in January tend to outperform the market in February.

Step-by-step explanation:

The above is consistent with the Efficient Market Hypothesis. All others are a direct contravention.

The efficient market hypothesis (EMH), also known as the efficient market theory, is a hypothesis that states that the prices of shares contain all information and that consistent alpha generation is impossible.

According to the hypothesis, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices.

This means that it should not be possible to outperform the overall market through professional stock selection or market timing.

The only way according to EMH that an investor can obtain better returns is by purchasing riskier investments.

By implication, this also means that it is not possible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information.

You would note that in the option D, earning (which is a key driver for demand of stock) is announced in one month. The natural reaction would be for the demand for that stock to surge in the next month.