LUBS3645– CHAPTER 4 -6 EXAM
QUESTIONS AND ANSWERS GRADED A+
2025/2026
Efficient. Markets Hypothesis (EMH) - ANS Stock prices already reflect all available
information. Any information that could be used to predict stock performance should already be
reflected in stock prices.
Random Walk - ANS Price changes should be random and unpredictable
Why do EMH use a random walk? - ANS Under the EMH, prices reflect all available
information. So, when prices change is because new information is available. Definitionally
speaking, new information must be unpredictable until it is out. Thus, stock prices that change
in response to new information also must move unpredictably.
What are the three kinds of EMH? - ANS Weak form Efficiency, Semi Strong Form Efficiency,
Strong Form Efficiency
Weak Form Efficiency - ANS Market prices reflect all historical information, so it is impossible
to make consistently superior profits by studying past returns
Semi Strong Form Efficiency - ANS Market prices reflect all publicly available information, so
prices will adjust immediately to public information
Strong Form Efficiency - ANS Market prices reflect all information, both public and private.
1 @COPYRIGHT 2026 ALLRIGHTS RESERVED.
, What is the relationship between the three kinds of EMH? - ANS Semi strong efficiency
implies weak form efficiency, but not vice versa.
Strong efficiency implies both semi and weak.
Technical Analysis of EMH - ANS Search for recurrent and predictable returns in stock prices
Why are technical analysts sometimes called chartists? - ANS They study recores/charts of
past stock prices, hoping to find patterns they can exploit to make a profit
If a market is weakly efficient, does technical analysis work? - ANS No, asany information
available from analyzing prices from the past is already reflected in the new price, so there is
not extra benefit in analyzing
Fundamental Analysis of EMH - ANS uses publicly available economic and accounting
information to predict stock prices and try to identify underpriced/overpriced stocks
What do fundamental analysts assume - ANS the stock price should equal the discounted
value of all expected future cash flows
If the markets are semi strong or strong form efficient, can you use fundamental analysis to
predict price change? - ANS if the analyst relies on publicly available information, their
evaluation would not be significantly more accurate than rival analysts
Passive Management - ANS Accepts EMH validity and does not try to outsmart the market.
They don't buy and sell securities frequently because the EMH indicates that stock prices are at
fair levels givena ll available information
How does Passive Management with EMH work? - ANS Establishing a well diversified
portfolio of securities without attempting to find under/overvalued stocks, where you buy and
hold portfolios
2 @COPYRIGHT 2026 ALLRIGHTS RESERVED.
QUESTIONS AND ANSWERS GRADED A+
2025/2026
Efficient. Markets Hypothesis (EMH) - ANS Stock prices already reflect all available
information. Any information that could be used to predict stock performance should already be
reflected in stock prices.
Random Walk - ANS Price changes should be random and unpredictable
Why do EMH use a random walk? - ANS Under the EMH, prices reflect all available
information. So, when prices change is because new information is available. Definitionally
speaking, new information must be unpredictable until it is out. Thus, stock prices that change
in response to new information also must move unpredictably.
What are the three kinds of EMH? - ANS Weak form Efficiency, Semi Strong Form Efficiency,
Strong Form Efficiency
Weak Form Efficiency - ANS Market prices reflect all historical information, so it is impossible
to make consistently superior profits by studying past returns
Semi Strong Form Efficiency - ANS Market prices reflect all publicly available information, so
prices will adjust immediately to public information
Strong Form Efficiency - ANS Market prices reflect all information, both public and private.
1 @COPYRIGHT 2026 ALLRIGHTS RESERVED.
, What is the relationship between the three kinds of EMH? - ANS Semi strong efficiency
implies weak form efficiency, but not vice versa.
Strong efficiency implies both semi and weak.
Technical Analysis of EMH - ANS Search for recurrent and predictable returns in stock prices
Why are technical analysts sometimes called chartists? - ANS They study recores/charts of
past stock prices, hoping to find patterns they can exploit to make a profit
If a market is weakly efficient, does technical analysis work? - ANS No, asany information
available from analyzing prices from the past is already reflected in the new price, so there is
not extra benefit in analyzing
Fundamental Analysis of EMH - ANS uses publicly available economic and accounting
information to predict stock prices and try to identify underpriced/overpriced stocks
What do fundamental analysts assume - ANS the stock price should equal the discounted
value of all expected future cash flows
If the markets are semi strong or strong form efficient, can you use fundamental analysis to
predict price change? - ANS if the analyst relies on publicly available information, their
evaluation would not be significantly more accurate than rival analysts
Passive Management - ANS Accepts EMH validity and does not try to outsmart the market.
They don't buy and sell securities frequently because the EMH indicates that stock prices are at
fair levels givena ll available information
How does Passive Management with EMH work? - ANS Establishing a well diversified
portfolio of securities without attempting to find under/overvalued stocks, where you buy and
hold portfolios
2 @COPYRIGHT 2026 ALLRIGHTS RESERVED.
