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Portfolios 502: The Efficient Market Theory

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1.
In an efficient market, only new information about a security can change its price.
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True. According to the theory, prices react to new information.
2.
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.
3.
The faster that information is incorporated into a security's price, _______.
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The more efficient the market. Efficiency depends to a great deal on available information being expressed through a security's price.
4.
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.
5.
Small-cap and large-cap stocks are examples of sub-asset categories.
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True. They are sub-categories of stocks, and they are described by their capitalizations.