What Is the Efficient Market Hypothesis? Practice Questions

1. What is the efficient market hypothesis? *

a. Markets are always the most efficient way to allocate resources.

b. Buyers and sellers in a market are always perfectly rational agents.

c. Asset prices already reflect all publicly available information.

d. Asset prices already reflect all of the facts about the state of the market.

2. You read about new technology that keeps clothes clean for a long time. You should infer that: *

a. Stock prices for laundry detergent companies will eventually go down because demand for laundry detergent will go down.

b. Stock prices for laundry detergent companies will eventually go up because traders tend to initially overreact to new technology.

c. Nothing will change because new technology rarely affects stock prices.

d. This information is already reflected in current stock prices because the new technology is public knowledge.

3. Companies X and Y are competing for a major government contract that would secure the future of either company. Stock prices for X are rising and stock prices for Y are falling. You should infer that: *

a. X is more likely to land the contract.

b. Y is more likely to land the contract.

c. X and Y are equally likely to land the contract.

d. There isn’t enough information to make an educated prediction.

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What Is the Efficient Market Hypothesis? Practice Questions

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