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1.
According to the efficient market theory, mutual funds will underperform the market by the amount of their transaction and management costs.
True. Since index funds match the market, the only thing reducing their performance is their costs.
2.
All possible information about a security is reflected in its price when a market's efficiency is _______.
Strong. The stronger the efficiency, the more likely that a security's price will reflect current information.
3.
What findings threw the efficient market theory into question?
That stocks that are unpopular tend to outperform. Fama and French found that buying stocks that have performed poorly during the past few years led to superior returns over the next few years. In other words, a contrarian investment strategy can lead to better results than a strategy of buying popular stocks.
4.
The faster that information is incorporated into a security's price, _______.
The more efficient the market. Efficiency depends to a great deal on available information being expressed through a security's price.
5.
A market index represents the entire market.
False. A market index represents a segment of the entire market.
