TTU Merriman FIN 3320 Exam 2-
Efficient Market Theory Questions and
Answers
Competition among investors also implies that profitable trading strategies are: -
ANSWER-self-destructing so that market prices are forced to better reflect intrinsic
value.
- because of competition, investors cannot sustain profits in the long-term in an
efficient market
We have to engage in what due to efficient market hypothesis? - ANSWER-passive
investment strategy, and to avoid active investment strategies
Passive management - ANSWER-Buy a well-diversified portfolio without attempting
to search out mispriced securities
- main portfolios are index mutual funds and index ETFs
- use if markets are efficient
Active management - ANSWER-Use different types of analysis to find mispriced
securities and trade them
- main analysis are technical analysis and fundamental analysis
- use if marekts are NOT efficient
The most active portfolio managers cannot what? - ANSWER-Consistently
outperform the market
Diversification - ANSWER-someone still needs to implement diversification (MPT)
Investor characteristics - ANSWER-tax bracket, age, risk aversion all play a role in
the final portfolio
Market frictions - ANSWER-professional investors will know the space and legal
jargon
Goal of a professional portfolio manager? - ANSWER-to tailor the portfolio to the
investors needs
Limitations of efficient market hypothesis - ANSWER-Does not imply markets are
always correct, only asserts that we can expect markets to be correct on average
Financial market bubble - ANSWER-a rapid escalation in the market price of an
investment to levels significantly above its intrinsic value
What is the Efficient Market Hypothesis?
, A) Market prices are always too high.
B) Market prices are based on investor emotions.
C) Market prices are set by government regulations.
D) Market prices fully reflect all available information.
E) Market prices never change. - ANSWER-D) Market prices fully reflect all available
information.
Which form of market efficiency suggests that stock prices reflect all past trading
information?
A) Weak form
B) Strong form
C) Semi-strong form
D) Random walk form
E) Basic form - ANSWER-A) Weak form
What does the semi-strong form of the Efficient Market Hypothesis state?
A) Stock prices reflect only historical prices.
B) Stock prices reflect all publicly available information.
C) Stock prices reflect all public and all private information.
D) Stock prices are always correct.
E) Stock prices are unpredictable. - ANSWER-B) Stock prices reflect all publicly
available information.
What type of information do stock prices reflect in a strong form efficient market?
A) Only historical prices
B) Only publicly available information
C) All relevant information, including public, private, and insider information
D) No information
E) Only government announcements - ANSWER-C) All relevant information,
including public, private, and insider information
What is the concept of a "random walk" in stock prices?
A) Stock prices move in predictable patterns.
B) Stock prices are fixed and do not change.
C) Stock prices move unpredictably.
D) Stock prices always go up.
E) Stock prices always go down. - ANSWER-C) Stock prices move unpredictably.
Which of the following best describes an efficient market?
A) A market where prices reflect all available information.
B) A market where prices are set by the government.
C) A market where prices are determined by a few large investors.
D) A market where prices are predictable.
E) A market where prices are influenced by rumors. - ANSWER-A) A market where
prices reflect all available information.
Which form of market efficiency includes the other two forms?
A) Weak form
B) Semi-strong form
C) Strong form
Efficient Market Theory Questions and
Answers
Competition among investors also implies that profitable trading strategies are: -
ANSWER-self-destructing so that market prices are forced to better reflect intrinsic
value.
- because of competition, investors cannot sustain profits in the long-term in an
efficient market
We have to engage in what due to efficient market hypothesis? - ANSWER-passive
investment strategy, and to avoid active investment strategies
Passive management - ANSWER-Buy a well-diversified portfolio without attempting
to search out mispriced securities
- main portfolios are index mutual funds and index ETFs
- use if markets are efficient
Active management - ANSWER-Use different types of analysis to find mispriced
securities and trade them
- main analysis are technical analysis and fundamental analysis
- use if marekts are NOT efficient
The most active portfolio managers cannot what? - ANSWER-Consistently
outperform the market
Diversification - ANSWER-someone still needs to implement diversification (MPT)
Investor characteristics - ANSWER-tax bracket, age, risk aversion all play a role in
the final portfolio
Market frictions - ANSWER-professional investors will know the space and legal
jargon
Goal of a professional portfolio manager? - ANSWER-to tailor the portfolio to the
investors needs
Limitations of efficient market hypothesis - ANSWER-Does not imply markets are
always correct, only asserts that we can expect markets to be correct on average
Financial market bubble - ANSWER-a rapid escalation in the market price of an
investment to levels significantly above its intrinsic value
What is the Efficient Market Hypothesis?
, A) Market prices are always too high.
B) Market prices are based on investor emotions.
C) Market prices are set by government regulations.
D) Market prices fully reflect all available information.
E) Market prices never change. - ANSWER-D) Market prices fully reflect all available
information.
Which form of market efficiency suggests that stock prices reflect all past trading
information?
A) Weak form
B) Strong form
C) Semi-strong form
D) Random walk form
E) Basic form - ANSWER-A) Weak form
What does the semi-strong form of the Efficient Market Hypothesis state?
A) Stock prices reflect only historical prices.
B) Stock prices reflect all publicly available information.
C) Stock prices reflect all public and all private information.
D) Stock prices are always correct.
E) Stock prices are unpredictable. - ANSWER-B) Stock prices reflect all publicly
available information.
What type of information do stock prices reflect in a strong form efficient market?
A) Only historical prices
B) Only publicly available information
C) All relevant information, including public, private, and insider information
D) No information
E) Only government announcements - ANSWER-C) All relevant information,
including public, private, and insider information
What is the concept of a "random walk" in stock prices?
A) Stock prices move in predictable patterns.
B) Stock prices are fixed and do not change.
C) Stock prices move unpredictably.
D) Stock prices always go up.
E) Stock prices always go down. - ANSWER-C) Stock prices move unpredictably.
Which of the following best describes an efficient market?
A) A market where prices reflect all available information.
B) A market where prices are set by the government.
C) A market where prices are determined by a few large investors.
D) A market where prices are predictable.
E) A market where prices are influenced by rumors. - ANSWER-A) A market where
prices reflect all available information.
Which form of market efficiency includes the other two forms?
A) Weak form
B) Semi-strong form
C) Strong form
