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500
Portfolios 502:
The Efficient Market Theory
Test your knowledge
Choose wisely. There is only one correct answer to each question.
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1.
Academics have challenged the efficient market theory because _______.
Choose wisely. There is only one correct answer.
It completely collapsed
Several irregularities have been observed
It has not made them rich
All of the above
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 _______.
Choose wisely. There is only one correct answer.
Weak
Semi-strong
Strong
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.
Choose wisely. There is only one correct answer.
True
False
True. Since prices reflect information, in an efficient market, investors are actually trading information.
4.
A market index represents the entire market.
Choose wisely. There is only one correct answer.
True
False
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.
Choose wisely. There is only one correct answer.
True
False
True. Since index funds match the market, the only thing reducing their performance is their costs.
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DONE