Understanding Market Efficiency

What are the three forms of market efficiency?

• Weak form, Semi-strong form, Strong form

• Market segmentation

• Market saturation

• Market equilibrium

Define the Efficient Market Hypothesis (EMH).

• The EMH suggests that markets are always inefficient and predictable.

• The Efficient Market Hypothesis claims that investors can easily outperform the market using insider information.

• The EMH states that asset prices are determined solely by historical performance.

• The Efficient Market Hypothesis (EMH) states that asset prices fully reflect all available information, making it impossible to consistently achieve higher returns than the market average.

What is the difference between weak, semi-strong, and strong market efficiency?

• Strong efficiency ignores all forms of information.

• Semi-strong efficiency is based solely on insider trading.

• Weak efficiency reflects past trading information, semi-strong efficiency includes all public information, and strong efficiency encompasses all information, including private.

• Weak efficiency considers only future predictions.

How does the Efficient Market Hypothesis relate to stock prices?

• Stock prices are influenced only by government regulations.

• Stock prices can be predicted with perfect accuracy.

• Stock prices are solely determined by company earnings.

• Stock prices reflect all available information, making it impossible to consistently outperform the market.

What are some common tests used to assess market efficiency?

• Debt-to-equity ratio assessment

• Event studies, autocorrelation tests, variance ratio tests, runs tests

• Market capitalization evaluation

• Price-earnings ratio analysis

Explain the concept of 'random walk' in relation to market efficiency.

• Stock prices are always predictable based on historical data.

• The 'random walk' theory posits that stock prices follow a random path, indicating that past movements do not predict future prices, which supports the idea of market efficiency.

• Random walk theory suggests that stock prices are influenced by external economic factors.

• Market efficiency means that all investors have the same information at all times.

What role do information asymmetries play in market efficiency?

• Information asymmetries can lead to market inefficiencies by distorting pricing and reducing trust in transactions.

• Information asymmetries always enhance market efficiency.

• Information asymmetries guarantee trust in all transactions.

• Information asymmetries have no impact on pricing.

How can behavioral finance challenge the Efficient Market Hypothesis?

• Behavioral finance has no impact on market trends or investor decisions.

• Behavioral finance supports the Efficient Market Hypothesis by showing that investors always act rationally.

• Market inefficiencies are solely caused by external economic factors, not psychological ones.

• Behavioral finance challenges the Efficient Market Hypothesis by demonstrating that psychological factors can lead to irrational investor behavior, resulting in market inefficiencies.

What is the significance of insider trading in the context of market efficiency?

• Insider trading undermines market efficiency by creating information asymmetry.

• Insider trading has no impact on market efficiency and is a common practice.

• Insider trading enhances market efficiency by providing more information to all investors.

• Insider trading is legal and promotes fair competition in the market.

Describe an example of a market anomaly that contradicts EMH.

• The January effect is a market anomaly that contradicts EMH.

• Market trends are predictable and consistent.

• Stock prices always rise in December.

• The efficient market hypothesis is always correct.