Efficient Capital Markets: II 1579 examine the autocorrelation of Wednesday-to- Wednesday returns for size grouped portfolios of stocks that trade on both Wednesdays. Like Lo and MacKinlay (1988), they find that weekly returns are positively autocorre lated, and more so for portfolios of small stocks. The first-order autocorrela tion of weekly returns on the portfolio of the largest decile of NYSE stocks for 1962-1985 is only 09. For the portfolios that include the smallest 40% of NYSE stocks, however, first-order autocorrelations of weekly returns are around. 3, and the autocorrelations of weekly returns are reliably positive out to 4 lags The results of Lo and MacKinlay(1988)and Conrad and Kaul ( 1988)show that, because of the variance reduction obtained from diversification, portfo ios produce stronger indications of time variation in weekly expected returns than individual stocks. Their results also suggest that returns are more predictable for small-stock portfolios. The evidence is, however, clouded by the fact that the predictability of portfolio returns is in part due to nonsyn chronous trading effects that, especially for small stocks, are not completely mitigated by using stocks that trade on successive Wednesdays An eye-opener among recent studies of short-horizon returns is French and Roll (1986). They establish an intriguing fact Stock prices are more variable when the market is open. On an hourly basis, the variance of price changes is 72 times higher during trading hours than during weekend nontrading hours. Likewise, the hourly variance during trading hours is 13 times the overnight nontrading hourly variance during the trading week One of the explanations that French and roll test is a market inefficiency hypothesis popular among academics; specifically, the higher variance of price changes during trading hours is partly transistory, the result of noise trading by uniformed investors( e. g, Black(1986)). Under this hypothesis pricing errors due to noise trading are eventually reversed and this induces negative autocorrelation in daily returns. French and Roll find that the first-order autocorrelations of daily returns on the individual stocks of larger (the top three quintiles of)NYSE firms are positive. Otherwise, the autocor relations of daily returns on individual stocks are indeed negative, to 13 lags Although reliably negative on a statistical basis, however the autocorrela tions are on average close to 0. Few are below -.01 One possibility is that the transitory price variation induced by noise trading only dissipates over longer horizons. To test this hypothesis, French and Roll examine the ratios of variances of N-period returns on individual stocks to the variance of daily returns, for N from 2 days to 6 months. If there is no transitory price variation induced by noise trading(specifically, if price changes are i i.d. ) the N-period variance should grow like N, and the variance ratios(standardized by N)should be close to 1. On the other hand with transitory price variation, the N-period variance should grow less than in proportion to N, and the variance ratios should be less than 1 For horizons(n beyond a week, the variance ratios are more than 2 standard errors below 1, except for the largest quintile of NYSE stocks. But the fractions of daily return variances due to transitory price variation are