Understanding Market Anomalies in Active Equity Investing

Very Hard Active Equity Investing Market Anomalies

In the context of active equity investing, market anomalies present opportunities for investors to achieve excess returns. One such anomaly is the 'January Effect', which suggests that stock prices tend to increase in the month of January more than in other months. Another example is the 'Value Effect', indicating that stocks with lower price-to-earnings ratios outperform those with higher ratios. Analysts at a quantitative asset management firm are examining these anomalies to determine the best strategy for enhancing returns in their actively managed equity portfolio.

After conducting historical performance analysis across different sectors, they focus on these two phenomena and plan to allocate resources based on their findings. Which of the following statements correctly asserts the implications of these anomalies on active equity management?

The January Effect is robust enough to be exploited consistently, implying that investors can achieve abnormal returns every January.

The Value Effect is highly reliant on market sentiment, suggesting that it may not be a reliable strategy throughout all market cycles.

Both the January Effect and Value Effect can be consistently relied upon for superior returns as they are global phenomena observed across various equity markets.

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