Market Efficiency practice questions

What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

Equity Investments

Market Efficiency

A market contains thousands of analysts, low trading costs, mandatory real-time disclosure, and few legal barriers to short selling. An analyst's profitable strategy uses only past price patterns after transaction costs. The strategy's persistence would most directly challenge:

Equity Investments

Market Efficiency

A portfolio manager estimates a stock's value using discounted expected cash flows of USD72 while the current quoted price is USD61. The most accurate interpretation is that USD72 and USD61 are, respectively:

Equity Investments

Market Efficiency

Weak-form market efficiency most directly implies that:

Equity Investments

Market Efficiency

Semi-strong-form market efficiency most directly implies that security prices reflect:

Equity Investments

Market Efficiency

A company releases unexpectedly favorable earnings at 8:00 a.m. By 8:05 a.m., the price has adjusted and traders using only the announcement earn no abnormal return. This result is most consistent with:

Equity Investments

Market Efficiency

A security's intrinsic value is best described as:

Equity Investments

Market Efficiency

High trading costs, short-sale constraints, and difficulty financing arbitrage positions most likely:

Equity Investments

Market Efficiency

A small-cap value strategy has earned abnormal returns in some long samples, but the return advantage is weaker after transaction costs and varies across periods. This evidence is best described as:

Equity Investments

Market Efficiency

An analyst believes prices reflect past prices, trading volume, all public information, and all material private information. The analyst's view is best described as:

Equity Investments

Market Efficiency

If equity markets are semi-strong-form efficient, an active strategy that selects stocks using published financial statements and consensus analyst forecasts is most likely to:

Equity Investments

Market Efficiency

A regulator's study finds that corporate insiders, trading legally in their own companies' shares, earn persistent risk-adjusted abnormal returns. Taken alone, this evidence most likely indicates that the market is:

Equity Investments

Market Efficiency

An investor quickly sells shares that have risen above cost but refuses to sell shares trading below cost, even after the companies' fundamentals have deteriorated, because she does NOT want to realize a loss. This behavior is most consistent with:

Equity Investments

Market Efficiency

An investor disregards her own analysis and buys a stock mainly because many other investors have been buying it. This behavior is best described as:

Equity Investments

Market Efficiency

A calendar-based return anomaly was documented in academic research and widely publicized. In the two decades since publication, the pattern has largely disappeared from market data. This outcome is most consistent with:

Equity Investments

Market Efficiency

Compared with the price of a small-cap stock followed by no professional analysts, the price of a heavily traded large-cap stock followed by forty analysts most likely:

Equity Investments

Market Efficiency

A stock's quarterly earnings exceed the consensus forecast by 20%. Its price rises 4.2% on the announcement day and then rises an additional 2.6% on a risk-adjusted basis over the following 45 trading days. A strategy of buying immediately after such positive surprises earns an average abnormal return of 1.8% per event after round-trip transaction costs of 0.8%. If this pattern persists, it most directly challenges: