Final answer:
An index fund is the most suitable investment for an investor who believes in market efficiency, offering diversification and mirroring the stock market's overall performance. It normally has high expected returns over time and offers good liquidity.
Step-by-step explanation:
An investor who believes that securities markets are efficient and always reflect all relevant information on expected return and risk would do well with an index fund. This type of mutual fund is designed to imitate the overall behavior of the stock market, thereby aligning with the investor’s belief in market efficiency. Since index funds aim to replicate the stock market's performance as a whole, they offer diversification which reduces the risk associated with investing in individual stocks. Diversification is key for managing risk, especially when an investor believes that no additional gains can be achieved by actively managing the portfolio due to the market's efficient nature.
The expected value of returns from an index fund aligns with the market average, which can be high over time. Although investments come with risks, the risks and returns for an index fund will generally be lower than those for an individual stock. Furthermore, liquidity is typically high for an index fund, provided it is readily traded, just like stocks.