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FRM Financial Risk Manager Practice Test

Category - The Efficient Market Hypothesis

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According to the Efficient Market Hypothesis (EMH), a market is said to be efficient if prices in that market reflect all available information. Is this following statement true or false?“It is possible to consistently outperform the market by taking advantage of all the information that the market already knows”
  1. True
  2. False
Explanation
According to the Efficient Market Hypothesis (EMH) prices on traded assets already reflect all known information and they instantly change to reflect new information. Therefore, it is impossible to consistently outperform the market by using any information that the market already knows.

Key takeaway: With automated training, the market is very near the “efficient market” that Eugene Fama dreamed up. When Warren Buffett was starting out in 1950, the market was full of inefficiency. Today, computerized trading bots snap up slightly undervalued assets in an instant.
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