Test your knowledge

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In an efficient market, investors are actually trading information.

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True

False

True. Since prices reflect information, in an efficient market, investors are actually trading information.

What findings about stocks threw the efficient market theory into question?

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Stock splits

Dividend increases

Insider buying

All of the above

Only one of the above.

All of the above. All of these have been found to affect stock prices in ways that called efficiency into question.

Security prices can be predicted in an efficient market.

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True

False

False. According to the theory, only new information can change prices, so predictions will not work.

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

False

True. Since index funds match the market, the only thing reducing their performance is their costs.

A market index represents the entire market.

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True

False

False. A market index represents a segment of the entire market.

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