Final answer:
In a perfectly efficient market, a passive investment strategy is superior because it reflects the difficulty of outperforming the market through stock selection or market timing, as all information is already included in stock prices.
Step-by-step explanation:
In a perfectly efficient market, the best investment strategy is probably a passive strategy. This is because, in an efficient market, all available information is already reflected in stock prices, making it very difficult for an investor to outperform the market through active strategy, which relies on selecting stocks or timing the market to achieve higher returns. In contrast, a passive strategy involves investing in a broad market index fund, which aims to replicate the performance of a market index.
A key assumption underlying a passive investment strategy in an efficient market is that it is hard to consistently outperform the market due to the randomness of stock price movements and the difficulty in identifying undervalued stocks when information is efficiently disseminated and priced in. Asset allocation and market timing are less relevant in this context because they are more aligned with active management techniques.