Efficient Capital Market Quiz and Flashcards

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Questions and Answers

What is the primary characteristic of an efficient capital market?

Rapid adjustment of security prices to new information (correct)

Slow adjustment of security prices

Price manipulation by investors

Inconsistent adjustment of security prices

What does 'beating the market' refer to in the context of market efficiency research?

Consistently earning a positive excess return on investments (correct)

Achieving a negative excess return on investments

Being indifferent to market performance

The inability to earn any return on investments

What does the efficient market hypothesis (EMH) predict about beating the market?

It is only possible to beat the market in bear markets

Beating the market has no relevance in an efficient market

It is always possible to beat the market

It is never possible to beat the market except by luck (correct)

What is the importance of competition among investors in an efficient capital market?

To cause security prices to adjust rapidly to reflect new information Signup and view all the answers

What is the primary reason for rapid price adjustment in an informationally efficient market?

Random arrival of new information about securities Signup and view all the answers

What does 'alpha' refer to in the context of 'beating the market'?

A positive excess return on investments Signup and view all the answers

What does the excess return on an investment represent?

Return in excess of that earned by other investments with the same risk Signup and view all the answers

What does the efficient market hypothesis (EMH) predict about the possibility of 'beating the market'?

'Beating the market' is not possible except by luck Signup and view all the answers

What are the assumptions that imply an informationally efficient market?

Competing profit-maximizing participants analyzing and valuing securities independently Signup and view all the answers

What does the prediction of the efficient market hypothesis (EMH) suggest about capital markets?

Capital markets cannot be beaten except by luck in an efficient state Signup and view all the answers

According to the text, which type of market efficiency suggests that all publicly available information is fully reflected in current prices, making it unlikely that fundamental analysis can outperform the market?

Semi-strong-form market efficiency Signup and view all the answers

What type of analysis focuses on patterns and trends in historical price and volume data to predict future price movements?

Technical analysis Signup and view all the answers

Which form of market efficiency implies that historical price and volume data are of no use in beating the market, making technical analysis useless?

Weak-form market efficiency Signup and view all the answers

What type of analysis assesses the intrinsic value of an asset based on financial statements, economic indicators, and company news?

Fundamental analysis Signup and view all the answers

According to the text, what do tests for market hypotheses include?

Statistical tests and event studies Signup and view all the answers

What is the assumption underlying technical analysis as mentioned in the text?

Market inefficiency and subjective signals Signup and view all the answers

According to the text, what does strong-form market efficiency assume?

All available information is fully reflected in prices, making it theoretically impossible for anyone to outperform the market. Signup and view all the answers

According to the text, what type of trading strategies based on technical indicators might achieve some success, especially in volatile markets?

Short-term trading strategies Signup and view all the answers

What do event studies reveal according to the text?

Stock prices adjust rapidly to major news announcements, making it difficult to make abnormal profits based on such information. Signup and view all the answers

What do random walk tests show according to the text?

Unpredictable patterns in price changes Signup and view all the answers

According to the Weak Form Efficient Market Hypothesis, stock prices move like:

Random walks Signup and view all the answers

Which form of the Efficient Market Hypothesis claims that stock prices reflect all information, even private?

Strong Form EMH Signup and view all the answers

What is an anomaly in the context of the Efficient Market Hypothesis?

Unexpected market occurrences Signup and view all the answers

Which group seems to benefit from private information, according to tests of the Strong Form EMH?

Corporate insiders Signup and view all the answers

What do most anomalies involve, based on the text?

Small amounts of money Signup and view all the answers

What is the main outcome of tests for Strong Form EMH?

Consistent underperformance of professional money managers Signup and view all the answers

According to the text, what do stock prices reflect in the Semi-strong Form EMH?

Only publicly available information Signup and view all the answers

Study Notes

An efficient capital market is characterized by quick price adjustments due to increased trading and investor attention.
The Efficient Market Hypothesis (EMH) and the Capital Asset Pricing Model (CAPM) are related concepts.
Technical analysis and fundamental analysis are different methods to evaluate investments.
Technical analysis focuses on patterns and trends in historical price and volume data to predict future price movements.
Fundamental analysis assesses the intrinsic value of an asset based on financial statements, economic indicators, and company news.
Technical analysis can be applied to short-term trading or medium-term investing, and can provide opportunities and risk management.
Fundamental analysis is used for long-term investing and provides a deeper understanding of a company's business and future prospects.
Technical analysis is based on the assumption of market inefficiency and can be subjective and prone to false signals.
Fundamental analysis assumes a semi-efficient market, where prices generally reflect available information but may deviate due to market psychology or short-term fluctuations.
Technical analysis is often considered incompatible with efficient market theory, as they have opposing views on market efficiency.
Market efficiency comes in different forms: weak-form, semi-strong-form, and strong-form.
Weak-form market efficiency implies that historical price and volume data are of no use in beating the market, making technical analysis useless.
Semi-strong-form market efficiency suggests that all publicly available information is fully reflected in current prices, making it unlikely that fundamental analysis can outperform the market.
Strong-form market efficiency assumes that all available information, including private information, is fully reflected in prices, making it theoretically impossible for anyone to outperform the market.
Tests for market hypotheses include statistical tests and event studies.
Weak-form market hypothesis tests often fail to find consistent relationships between past price changes and future returns.
Event studies reveal that stock prices adjust rapidly to major news announcements, making it difficult to make abnormal profits based on such information.
Technical analysis strategies based on historical data generally underperform against simple buy-and-hold strategies.
Certain short-term trading strategies using technical indicators might achieve some success, especially in volatile markets.
Some argue that certain asset classes, like small-cap stocks, might exhibit weak relationships between past and future returns, offering potential exploitable inefficiencies.
Random walk tests show no predictable patterns in price changes.

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Description

This quiz provides an overview of efficient capital markets, including the rapid adjustment of security prices to new information, the reflection of all available information in current security prices, and the concept of beating the market by consistently earning a positive excess return.

Efficient Capital Market Overview

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