Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict ________.
A) the strong-form EMH
B) the weak-form EMH
C) technical analysis
D) the semistrong-form EMH

Question

Quizplus · Accepted Answer

Joe's trading behavior contradicts the weak-form EMH, which suggests that past stock prices and trading patterns cannot be used to predict future prices. If Joe's trading behavior becomes a widely adopted pattern, it would prove that the weak-form EMH is not entirely accurate. It does not contradict the strong-form EMH, since it assumes that even insider information cannot be used to outperform the market. It does not contradict technical analysis, which uses past patterns to make trading decisions, but is not a form of market efficiency. The semistrong-form EMH assumes that publicly available information is immediately reflected in stock prices, which may or may not conflict with Joe's trading behavior depending on the information he used in his decision-making process.

Joe Bought a Stock at $57 Per Share