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Portfolios 502: The Efficient Market Theory

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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.
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True. Since index funds match the market, the only thing reducing their performance is their costs.
2.
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.
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.
Which market index tracks 500 of the largest US company stocks?
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Standard and Poor's. Standard and Poor's tracks 500 of the largest US company stocks.
5.
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.