1. (a) Discuss the rationale for expecting an efficient capital market. What factor would you look for to differentiate the market efficiency for two alternative stocks?

(b) Define and discuss the weak-form EMH. Describe the two sets of tests used to examine the weak-form EMH.

(c) Define and discuss the semistrong-form EMH. Describe the two sets of tests used to examine the semistrong-form EMH.

(d) What is meant by the term abnormal rate of return?

(e) Describe how you would compute the abnormal rate of return for a stock for a period surrounding an economic event. Give a brief example for a stock with a beta of 1.40.

(f) Assume you want to test the EMH by comparing alternative trading rules to a buy-and-hold policy. Discuss the three common mistakes that can bias the results against the EMH.