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Portfolios 502: The Efficient Market Theory

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1.
Academics have challenged the efficient market theory because _______.
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Several irregularities have been observed. Academics have noted many irregular phenomena that caused them to call the theory into question.
2.
All possible information about a security is reflected in its price when a market's efficiency is _______.
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Strong. The stronger the efficiency, the more likely that a security's price will reflect current information.
3.
In an efficient market, investors are actually trading information.
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True. Since prices reflect information, in an efficient market, investors are actually trading information.
4.
A market index represents the entire market.
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False. A market index represents a segment of the entire market.
5.
According to the efficient market theory, mutual funds will underperform the market by the amount of their transaction and management costs.
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True. Since index funds match the market, the only thing reducing their performance is their costs.