1. You have developed a new trading strategy that invests equally in stocks with a correlation of...
Question:
1. You have developed a new trading strategy that invests equally in stocks with a correlation of less than (but greater than 0) to the S&P 500 index and rebalances the portfolio monthly. You have noticed that the trading strategy always yields higher returns than the 1-month treasury bill rate. Does this violate the EMH?
(a) Yes, because the returns of the strategy are always higher than the treasury bill rate.
(b) No, because the payoffs of the strategy are still risky.
2. As a research analyst, you found that the rate of inflation this quarter predicts the S&P 500 index next quarter (ie, next quarter's change in the S&P 500 index is partly explained by the change in the inflation rate this quarter). Is this inconsistent with EMH?
Fundamentals of corporate finance
ISBN: 978-0073382395
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan