Question

The efficient markets hypothesis says that:

The three major stock market indices provide consistent information about the stock market
Stock prices embody all publicly available information about companies' financial fundamentals; therefore stocks are neither overpriced or underpriced
Stock prices reflect irrational beliefs of investors about companies' fundamentals; therefore, stocks may be overpriced or underpriced
Financial fluctuations in markets do not affect the macroeconomy in any significant way

Answer 1

The Efficient Markets Hypothesis states that stock prices integrate all publicly available information, which means that equities are fairly priced and neither overpriced nor underpriced. This depends on the efficiency of the market in disseminating information about company fundamentals and future expectations, rather than on irrational investor beliefs.

Step-by-step explanation:

The Efficient Markets Hypothesis (EMH) posits that stock prices reflect all publicly available information about a company's financial fundamentals. Hence, according to the EMH, stocks are neither consistently overpriced nor underpriced because they are priced based on the collective knowledge of all market participants.

Contrary to other statements, the EMH implies that it's not the irrational beliefs of investors, but the vast array of information available to them that determines stock prices. Additionally, the hypothesis suggests that while equities represent ownership in corporations and the equity market is competitive, it is the market's efficiency in processing information that keeps stocks fairly valued.

This idea has significant implications for stock analysts and investors, pushing them to analyze expectations of a company's future performance rather than just current profitability.