Question

Darnell and Eleanor are building their portfolios. Darnell purchases shares in a mutual fund and pays fees to a manager who actively manages the mutual fund's portfolio. He does so because he believes that the manager can identify inexpensive stocks that will rise in value. Eleanor is not convinced. She buys shares in an index fund—a type of mutual fund that simply buys all of the stocks in a given stock index rather than actively managing a portfolio. Eleanor builds her portfolio based on the notion that:

a. All stocks are overvalued.
b. The stock market exhibits informational efficiency.
c. Stock analysts can use fundamental analysis to identify undervalued stocks.

Answer 1

b. The stock market exhibits informational efficiency.

Step-by-step explanation:

According to the efficient market hypothesis, it is believed that share prices reflect all information and consistent alpha generation is impossible. So, if Eleanor buys shares from an index fund, she believes shares are efficiently priced.

On the other hand, Darnell is buying under valued stocks with the hopes of earning a positive alpha