CFAI Practice: M03 — Market Efficiency

Source: CFAI CFA1 Equity Practice 2026 Total: 5 questions

Questions

Question 1

An investor consistently earns abnormal returns by trading stocks based on patterns observed in historical price charts. This evidence most likely contradicts which form of the efficient market hypothesis?

  • A. Strong form
  • B. Semi-strong form
  • C. Weak form

Question 2

A portfolio manager who analyzes publicly available financial statements to identify undervalued securities is least likely to earn abnormal returns in a market that is:

  • A. Weak-form efficient only
  • B. Semi-strong-form efficient
  • C. Neither weak-form nor semi-strong-form efficient

Question 3

The “January effect,” where small-cap stocks tend to outperform in January, is best described as a:

  • A. Fundamental anomaly
  • B. Calendar anomaly
  • C. Technical anomaly

Question 4

According to behavioral finance, investors who overweight recent experience when making forecasts are most likely exhibiting:

  • A. Loss aversion
  • B. Overconfidence bias
  • C. Representativeness bias

Question 5

If markets are strong-form efficient, which of the following investment strategies would most likely be optimal?

  • A. Active management using insider information
  • B. Active management using fundamental analysis
  • C. Passive management using index funds