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Q6. Which of the following is NOT an assumption that underlies an efficient capital market?fficeffice" />

A)   The expected returns implicitly include risk in the price of the security.

B)   Investors adjust their estimate of security prices slowly to reflect their interpretation of the new information received.

C)   New information comes to the market in a random fashion and the timing of the news announcements are independent of each other.

Correct answer is B)

Investors adjust their estimate of security prices rapidly to reflect their interpretation of the new information.

 

Q7. Which of the following statements regarding efficient capital markets and its underlying assumptions is least accurate?

A)   If the underlying assumptions for efficient capital markets hold true, then price changes are independent and random.

B)   Efficient markets require that a large number of profit-maximizing investors come together to collectively analyze and value securities.

C)   Price adjustments may be imperfect but are unbiased.

Correct answer is B)

Efficient markets require that a large number of competing profit-maximizing participants analyze and value securities independently of one another.

 

Q8. Which of the following would be inconsistent with an efficient market?

A)   Stock prices adjust rapidly to new information.

B)   Price adjustments are biased.

C)   Price changes are independent.

Correct answer is B)

Market efficiency assumes that investors adjust their estimates of security prices rapidly to reflect their unbiased interpretation of the new information. New information arrives randomly and independently. Therefore, price changes are independent.

 

Q9. In an efficient market new information flows:

A)   directly.

B)   in an orderly fashion.

C)   randomly.

Correct answer is C)

Market efficiency assumes that new information comes to the market in a random fashion and that the timing of news announcements is independent of each other.

 

Q10. If the efficient markets hypothesis is true, portfolio managers should do all of the following EXCEPT:

A)   Minimize transaction costs.

B)   Work more with clients to better quantify their risk preferences.

C)   Spend more time working on security selection.

Correct answer is C)

In an efficient market all stocks are properly priced and reflect all publicly available information. Therefore, individual selection of stocks is not important the only thing that is relevant is the portfolio’s beta.