If the Markets Are Efficient, Then Why Is Asset Allocation

question 39

Multiple Choice

If the markets are efficient, then why is asset allocation still considered important?

• A)because the risk-return relationship must still be considered
• B)because market timing is critical in efficient markets
• C)because individual security selection is the key to the markets being efficient
• D)because asset allocation combines market timing with individual security selection
• E)because the majority of market gains tend to occur only over long periods of time

---

Definitions:

Residual Dividend Policy

A strategy where dividends paid to shareholders are based on earnings left after all operational and expansion financing needs are met.

Target Capital Structure

The mix of debt, preferred stock, and common equity that a company aims to hold to minimize its cost of capital.

Projected Capital Budget

A forward-looking budget that outlines anticipated investments in projects and assets for the purpose of long-term growth.

Net Income

The net income of a business following the deduction of all costs and taxes from its overall revenue.