R02 Efficient market hypothesis: free practice questions

1. Question 1 of 5

   Who developed the efficient market hypothesis (EMH)?

   Option A: Harry MarkowitzOption B: Eugene FamaOption C: Stephen RossOption D: Charles Goodhart

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   The answer is B: Eugene Fama

   Eugene Fama developed the EMH in the 1960s: in an open and efficient market, prices fully reflect all available information and adjust rapidly to new information.

   Why the other options are wrong

   A

   Markowitz laid the foundations of MPT.

   C

   Ross developed APT.

   D

   Goodhart is known for his law on targets and measures.

2. Question 2 of 5

   If a market is weak-form efficient, which approach can't consistently beat it?

   Option A: Technical analysis of past prices and volumesOption B: Buying an index trackerOption C: Trading on inside information not yet made publicOption D: Taking on more market risk through a higher beta

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   The answer is A: Technical analysis of past prices and volumes

   Weak-form efficiency means prices already reflect all past price and volume information, so technical analysis of historical trading data can't consistently produce market-beating returns.

   Why the other options are wrong

   B

   A tracker aims to match the market, not beat it.

   C

   Weak form says nothing about private information.

   D

   More risk can still bring higher expected returns.

3. Question 3 of 5

   What information does strong-form efficiency say is reflected in prices?

   Option A: All information, public and private, including insiders'Option B: All publicly available information, but nothing privateOption C: Past prices and trading volumes only, nothing moreOption D: Only information published by the FCA

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   The answer is A: All information, public and private, including insiders'

   Strong-form efficiency means prices reflect all information any investor could acquire, including private information held by insiders such as directors and their advisers.

   Why the other options are wrong

   B

   That's semi-strong efficiency.

   C

   That's weak-form efficiency.

   D

   Strong form covers all information.

4. Question 4 of 5

   Which market is generally considered least efficient?

   Option A: Venture capitalOption B: US large cap sharesOption C: Large FTSE 100 sharesOption D: Government bonds

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   The answer is A: Venture capital

   Efficiency varies. Government bonds and large caps are very efficient; smaller or less followed shares less so; venture capital, with no liquid market and uneven information, least of all.

   Why the other options are wrong

   B

   These are widely followed and efficiently priced.

   C

   Large, widely followed shares are very efficiently priced.

   D

   Government bond markets are considered extremely efficient.

5. Question 5 of 5

   From which theory was the EMH developed?

   Option A: Random walk theoryOption B: Modern portfolio theoryOption C: Arbitrage pricing theoryOption D: Prospect theory

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   The answer is A: Random walk theory

   The EMH grew from random walk theory: price movements are random and unpredictable, because new information arrives unpredictably.

   Why the other options are wrong

   B

   MPT is about building efficient portfolios.

   C

   APT is a multi-factor pricing model.

   D

   Prospect theory is part of behavioural finance.

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