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Portfolios 502: The Efficient Market Theory

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1.
A market index represents the entire market.
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False. A market index represents a segment of the entire market.
2.
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.
3.
What findings about stocks threw the efficient market theory into question?
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All of the above. All of these have been found to affect stock prices in ways that called efficiency into question.
4.
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.
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.