Efficient markets

1 What do we mean by beating the market?

E) Earning a higher return than the average market return.

2 What do we mean when we say active managers underperform?

D) Active managers fail to achieve returns higher than the market average.

3 Why might stock prices not always reflect their intrinsic value even in an efficient market?

B) Temporary deviations from intrinsic value can occur while investors process new information.

4 In the context of efficient markets, what do we mean by new information?

B) Unpredictable events or data that have not yet been known or considered

5 What do we mean by active portfolio management?

B) Regularly analyzing and trading investments to outperform the market.

6 What do we mean by mispricing?

D) When the market price of an investment does not reflect its true intrinsic value.

7 What is the difference between a random walk and an efficient market?

D) A random walk means stock price changes are random and unpredictable, while an efficient market means prices fully reflect all available information.

8 What does it mean for prices to reflect available information?

E) Prices incorporate and represent all known information about an investment.

9 What is a financial market bubble?

B) When market prices rise significantly above intrinsic value.

10 What is the implication of the Efficient Market Hypothesis for investors?

E) Investors are better off investing in a diversified index portfolio.

11 What does the Efficient Market Hypothesis suggest about active portfolio management?

C) Active management is likely to underperform passive management.

12 Which of the following best describes an efficient market?

A) A market where prices reflect all available information.

13 What does it mean for new information to be disseminated rapidly amongst investors?

A) New information quickly spreads and is reflected in stock prices.

14 What does the semi-strong form of the Efficient Market Hypothesis state?

B) Stock prices reflect all publicly available information.

15 What does it mean for a trading strategy to be self-destructing?

C) It becomes less profitable as more investors adopt it.

16 What is the Efficient Market Hypothesis?

D) Market prices fully reflect all available information.

17 What is the concept of a "random walk" in stock prices?

C) Stock prices move unpredictably.

18 What is the main conclusion of the Efficient Market Hypothesis for investing?

C) Passively invest in a diversified portfolio.

19 If markets are efficient, what use are portfolio managers?

E) All of the above.

20 Why do most studies consistently find that active portfolio managers underperform?

A) Market prices already reflect all available information, making it difficult to outperform the market.

21 If prices follow a random walk does this mean that intrinsic value is irrelevant?

D) No, because intrinsic value is a fundamental determinant of price levels over the long run, while a random walk is about the change in prices over a short period of time.

22 Efficient markets imply that the market price of an investment will always be equal to its intrinsic value.

B) False

23 Which of the following best describes passive portfolio management?

D) Buying and holding a well-diversified portfolio.

24 What happens to new information in an efficient market?

A) It is quickly reflected in stock prices.

25 Why are stock price changes considered random in an efficient market?

D) Prices react only to new information, which is unpredictable.

26 What does it mean if a market is weak form efficient?

A) Stock prices reflect all historical price information.

27 Because markets are efficient there is no need for portfolio managers

B) False

28 Why might a financial market bubble challenge the Efficient Market Hypothesis?

E) Bubbles occur when prices do not reflect intrinsic value.

29 What is the role of competition among investors in an efficient market?

D) It helps stock prices reflect all available information.

30 According to the Efficient Market Hypothesis, why do stock prices change?

B) Because of new information.

31 Which form of market efficiency includes the other two forms?

C) Strong form

32 Which form of market efficiency suggests that stock prices reflect all past trading information?

A) Weak form

33 Why might active portfolio management underperform passive management according to the Efficient Market Hypothesis?

E) Active managers incur higher costs and often fail to consistently beat the market

34 What type of information do stock prices reflect in a strong form efficient market?

C) All relevant information, including public, private, and insider information

35 What is the practical implication of the Efficient Market Hypothesis for stock picking?

B) Stock picking is unnecessary in an efficient market.

36 In the context of efficient markets, what do we mean by competition?

C) Many investors independently seeking higher returns, leading to a desire to be the first to find new information