FFM Week 7 (Market Efficiency) Test with
Complete Solutions 2025
An efficient market is one in which share prices fully reflect... - ANSWER available
information
Market Efficiency - ANSWER The price of an asset should reflect, instantaneously, all
available information in the market
According to the ______________ ____________ __________, no investor has an
advantage in predicting a return on a stock price because no one has access to
information not already available to everyone else - ANSWER efficient markets
hypothesis
A market is efficient when price equals... - ANSWER value of stock
The quicker the market adjusts prices in response to relevant, new information, the
______________ the market efficiency - ANSWER greater
In an efficient market, investors should only expect to obtain a normal rate of return.
Why? - ANSWER Information is reflected in prices immediately, so no investor can gain
an advantage by sourcing information, so the investor cannot make abnormal returns -
the price adjusts before the investor has time to trade on it
Why should firms expect to receive a fair value for the securities they sell in an efficient
market? - ANSWER Fair means that the price they receive from issuing securities is the
present value. Thus, valuable financing opportunities that arise from fooling investors
are unavailable in efficient capital markets
, In addition to price responding to new information instantaneously, market efficiency
also depends on how good the market is at distinguishing between ... and ... - ANSWER
relevant
irrelevant information
If a market responds to 'fake news' such as a fake Tweet e.g stock price crashes, the
market is believed to be _____________ - ANSWER inefficient
Random Walk Hypothesis (RWH) - ANSWER Security price changes are unpredictable,
and driven by relevant new information
If RWH is true, then... - ANSWER It is *not* possible to predict future changes in prices
If RWH is false, then... - ANSWER There is a serial correlation between successive price
changes (it is possible to predict future price changes(
Explain why RWH is random using an equation - ANSWER Price of stock today, is equal
to the sum of the last observed price + expected return + random error
The random component is due to new information, and is unrelated to the random
component in any past period.
Hence this random component is not predictable from past prices
Equation representing Random Walk Hyptothesis - ANSWER Pt = Pt-1 + Expected Return
+ Random Error
(Next price = Previous Price + Expected Return + Random Error)
Random error arises from new information released, uncorrelated to previous random
components
Complete Solutions 2025
An efficient market is one in which share prices fully reflect... - ANSWER available
information
Market Efficiency - ANSWER The price of an asset should reflect, instantaneously, all
available information in the market
According to the ______________ ____________ __________, no investor has an
advantage in predicting a return on a stock price because no one has access to
information not already available to everyone else - ANSWER efficient markets
hypothesis
A market is efficient when price equals... - ANSWER value of stock
The quicker the market adjusts prices in response to relevant, new information, the
______________ the market efficiency - ANSWER greater
In an efficient market, investors should only expect to obtain a normal rate of return.
Why? - ANSWER Information is reflected in prices immediately, so no investor can gain
an advantage by sourcing information, so the investor cannot make abnormal returns -
the price adjusts before the investor has time to trade on it
Why should firms expect to receive a fair value for the securities they sell in an efficient
market? - ANSWER Fair means that the price they receive from issuing securities is the
present value. Thus, valuable financing opportunities that arise from fooling investors
are unavailable in efficient capital markets
, In addition to price responding to new information instantaneously, market efficiency
also depends on how good the market is at distinguishing between ... and ... - ANSWER
relevant
irrelevant information
If a market responds to 'fake news' such as a fake Tweet e.g stock price crashes, the
market is believed to be _____________ - ANSWER inefficient
Random Walk Hypothesis (RWH) - ANSWER Security price changes are unpredictable,
and driven by relevant new information
If RWH is true, then... - ANSWER It is *not* possible to predict future changes in prices
If RWH is false, then... - ANSWER There is a serial correlation between successive price
changes (it is possible to predict future price changes(
Explain why RWH is random using an equation - ANSWER Price of stock today, is equal
to the sum of the last observed price + expected return + random error
The random component is due to new information, and is unrelated to the random
component in any past period.
Hence this random component is not predictable from past prices
Equation representing Random Walk Hyptothesis - ANSWER Pt = Pt-1 + Expected Return
+ Random Error
(Next price = Previous Price + Expected Return + Random Error)
Random error arises from new information released, uncorrelated to previous random
components
