Question

If financial markets are efficient, that suggests that:_____.

a. investors cannot expect to outperform the market consistently.
b. security prices are random.
c. investors cannot earn superior.
d. returns bearing additional risk will not increase return.

Answer 1

A

Step-by-step explanation:

The efficient market hypothesis posits that market prices contains all information in the market. As a result, an investor cannot consistently expect to outperform the market or consistently generate a positive alpha.

The efficient market hypothesis thus suggests a passive form of investment.

Forms of the efficient market hypothesis

a. the weak form - market prices contain information about past market prices. thus there is no need for technical analysis

b. the semi strong - it posits that market prices consists of all publicly available information

c. the strong form - it submits that market prices reflects both publicly and privately available information. As a result, excess returns cannot be earned consistently through insider trading