File: Ch.12, Chapter 12: Market Efficiency
Multiple Choice Questions
1. We can expect that the U.S. stock markets will be efficient for all of the following
reasons EXCEPT:
a. A large number of rational, profit-maximizing investors exist who actively
participate in the U.S. market by analyzing, valuing, and trading stocks.
b. The U.S. economy is the largest in the world, with the most sophisticated
investors.
c. Information is costless and widely available to market participants at
approximately the same time.
d. Investors react quickly and fully to the new information, causing stock prices to
adjust accordingly.
Ans: b
Difficulty: Easy
Ref: The Concept of an Efficient Market
2. An efficient market is defined as one in which:
a. all participants have the same opportunity to make the same returns.
b. all participants have the same legal rights and transactions costs.
c. securities prices quickly and fully reflect all available information.
d. securities prices are completely in line with the intrinsic value.
Ans: c
Difficulty: Easy
Ref: The Concept of an Efficient Market
3. All “known” information means:
a. past information only.
b. past and current information.
c. past, current, and inferred information.
d. past, current, inferred and relative information.
Ans: c
Difficulty: Moderate
Ref: The Concept of an Efficient Market
4. What is the result of the widespread usage of the Internet with regards to efficient
markets?
a. It makes information cheaper and more accessible thus making markets more
efficient.
Chapter Twelve 148
Market Efficiency
, b. It is subject to new regulation thus marking markets less efficient.
c. It increases the volatility of security prices thus making markets less efficient.
d. It increases competition among brokers thus making markets more efficient.
Ans: a
Difficulty: Moderate
Ref: The Concept of an Efficient Market
5. If a market is inefficient, as new information is received about a security:
a. nothing will happen.
b. the stock price will fall at first and then later rise.
c. there will be a lag in the adjustment of the stock price
d. there will be negative demand for the stock.
Ans: c
Difficulty: Difficult
Ref: The Concept of an Efficient Market
6. All of the following conditions must occur for a market to be considered efficient
except:
a. Information is costless and widely available to market participants at
approximately the same time.
b. Information is generated in a specific fashion such that announcements are
basically dependent on each other.
c. There are a large number of rational, profit-maximizing investors who actively
participate in the market.
d. Investors react quickly and fully to the new information, causing stock prices to
adjust accordingly.
Ans: b
Difficulty: Difficult
Ref: The Concept of an Efficient Market
7. Tests of the semistrong EMH include:
a. regression analysis.
b. correlation tests that compare the security returns to the overall market return.
c. tests of the speed of adjustment of stock prices to company announcements.
d. queuing line theory tests.
Ans: c
Difficulty: Difficult
Ref: The Concept of an Efficient Market
8. Which of the following markets is generally considered to be the most efficient:
a. China.
Chapter Twelve 149
Market Efficiency
Multiple Choice Questions
1. We can expect that the U.S. stock markets will be efficient for all of the following
reasons EXCEPT:
a. A large number of rational, profit-maximizing investors exist who actively
participate in the U.S. market by analyzing, valuing, and trading stocks.
b. The U.S. economy is the largest in the world, with the most sophisticated
investors.
c. Information is costless and widely available to market participants at
approximately the same time.
d. Investors react quickly and fully to the new information, causing stock prices to
adjust accordingly.
Ans: b
Difficulty: Easy
Ref: The Concept of an Efficient Market
2. An efficient market is defined as one in which:
a. all participants have the same opportunity to make the same returns.
b. all participants have the same legal rights and transactions costs.
c. securities prices quickly and fully reflect all available information.
d. securities prices are completely in line with the intrinsic value.
Ans: c
Difficulty: Easy
Ref: The Concept of an Efficient Market
3. All “known” information means:
a. past information only.
b. past and current information.
c. past, current, and inferred information.
d. past, current, inferred and relative information.
Ans: c
Difficulty: Moderate
Ref: The Concept of an Efficient Market
4. What is the result of the widespread usage of the Internet with regards to efficient
markets?
a. It makes information cheaper and more accessible thus making markets more
efficient.
Chapter Twelve 148
Market Efficiency
, b. It is subject to new regulation thus marking markets less efficient.
c. It increases the volatility of security prices thus making markets less efficient.
d. It increases competition among brokers thus making markets more efficient.
Ans: a
Difficulty: Moderate
Ref: The Concept of an Efficient Market
5. If a market is inefficient, as new information is received about a security:
a. nothing will happen.
b. the stock price will fall at first and then later rise.
c. there will be a lag in the adjustment of the stock price
d. there will be negative demand for the stock.
Ans: c
Difficulty: Difficult
Ref: The Concept of an Efficient Market
6. All of the following conditions must occur for a market to be considered efficient
except:
a. Information is costless and widely available to market participants at
approximately the same time.
b. Information is generated in a specific fashion such that announcements are
basically dependent on each other.
c. There are a large number of rational, profit-maximizing investors who actively
participate in the market.
d. Investors react quickly and fully to the new information, causing stock prices to
adjust accordingly.
Ans: b
Difficulty: Difficult
Ref: The Concept of an Efficient Market
7. Tests of the semistrong EMH include:
a. regression analysis.
b. correlation tests that compare the security returns to the overall market return.
c. tests of the speed of adjustment of stock prices to company announcements.
d. queuing line theory tests.
Ans: c
Difficulty: Difficult
Ref: The Concept of an Efficient Market
8. Which of the following markets is generally considered to be the most efficient:
a. China.
Chapter Twelve 149
Market Efficiency
