Question 1

Define the three forms of market efficiency.

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Question 2

Suppose your cousin invests in the stock market and doubles her money in a single year while the market, on average, earned a return of only about 15%. Is your cousin's performance a violation of market efficiency?

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Question 3

Do you think the lessons from capital market history will hold for each year in the future? That is, as an example, if you buy small stocks will your investment always outperform Treasury bills?

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Question 4

Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?

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Question 5

Explain why it is that in an efficient market, investments have an expected NPV of zero.

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Question 6

The Government has insider trading laws which punish individuals who trade in the securities markets using information that is not publicly known. Explain how these laws might affect the degree of market efficiency that currently exists in our capital markets.

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Question 7

How do you think the stock market would be affected if the laws were changed so that trading on insider information was no longer illegal? What would be the impact on the goal of the financial manager if such a change were to occur?

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Question 8

What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?

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Question 9

Provide a definition for the concept of geometric average return.

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Quiz 12: Lessons From Capital Market History