Ian Clark, CFA, is a technical analyst. Clark believes that information is incorporated gradually into securities markets and that, as a technician, he can take advantage of this process. However, tests of the efficient market hypothesis indicate security returns are random over time and new information is processed rapidly. Clark makes the following statements:
Statement 1:Studies have reported that small capitalization stock returns are positive on a risk-adjusted basis.
Statement 2:Although the academic research indicates that markets are weak form efficient, they are not because many technical analysts beat the market.
Determine whether Clark's statements regarding tests of market efficiency are correct or incorrect.
Click on the arrows to vote for the correct answer
A. B. C.B
Based on the given information, let's evaluate Ian Clark's statements:
Statement 1: Studies have reported that small capitalization stock returns are positive on a risk-adjusted basis.
This statement is not explicitly related to the efficient market hypothesis (EMH). It is a general observation about small capitalization stock returns. Without further context or information about the studies mentioned, it is difficult to determine the accuracy of this statement. Therefore, we cannot definitively say whether Statement 1 is correct or incorrect based on the information provided.
Statement 2: Although the academic research indicates that markets are weak form efficient, they are not because many technical analysts beat the market.
This statement contradicts the efficient market hypothesis. The efficient market hypothesis suggests that all available information is quickly and accurately reflected in security prices, making it difficult for investors to consistently outperform the market based on publicly available information. According to the EMH, security returns are random and unpredictable, and any observed outperformance is due to luck rather than skill.
Ian Clark's assertion that technical analysts can consistently beat the market challenges the EMH. However, it is important to note that the statement does not provide any evidence or data to support this claim. It is merely an opinion or belief of Ian Clark, the technical analyst.
Based on the information provided, it is incorrect to claim that markets are not weak form efficient solely based on the belief that technical analysts can beat the market. The EMH, which is supported by extensive academic research, suggests that such outperformance is unlikely to be consistent or predictable.
Therefore, Statement 2 is incorrect.
In summary, the correct answer is:
C. Only Statement 2 is correct.