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Consider the following statement: “For markets to be informationally efficient, all investors must be rational”. Is...

Consider the following statement: “For markets to be informationally efficient, all investors must be rational”. Is this statement true? Why/why not? (you will be marked on the justification(s) provided).

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Answer #1

The statement stating“For markets to be informationally efficient, all investors must be rational” is very true. One of the most significant ideas in modern portfolio hypothesis is the Efficient Market Hypothesis (EMH): the market is thought to be productive, since there is a lot of rational, benefit seeking and risk turning away inestors contending in estimating the future estimation of stocks. Any new change identified with a stock is quickly known in the whole speculation network and before long reflected in the cost of the stock.

When the investors are rational in nature,they will not be easily influenced in any kind of fraudulent activities and there belief will be on efficient market theory. Therefore they will not be ready to take any kind of unacceptable risk and thus will not try to acheive return much above the market trend.

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