Question

The efficient market hypothesis says that A. market prices reflect underlying asset values. B. individual investors...

The efficient market hypothesis says that

A. market prices reflect underlying asset values.

B. individual investors should not participate in the financial markets.

C. investors should expect to earn abnormal profits.

D. financial managers can accurately time stock and bond sales.

E. creative accounting can be used to inflate stock prices.

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Answer #1

Efficient market hypothesis says that:

Ans. is option A. Market prices reflect underlying asset values.

the theory states that it is impossible to beat the market and the market prices reflect all the available information. i.e. stocks are always traded at fair value, and hence there is no chance of purchasing the same at lesser value and later selling at abnormal gains. hence option C is not correct.

there always is a time lapse in the publicising of information and taking of decisions. hence, no one can accurately time stock and bond sales.

individual investors are vital part of the markets, and there in no such assumption in the efficient market hypothesis. hence b is also not correct.

creative accounting is window dressing, which is not allowed as per the provisions of various statutes. and hence D also is incorrect.

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