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You are starting your first job after college and are looking for a mutual fund in...

You are starting your first job after college and are looking for a mutual fund in which to invest some of your retirement savings. You research a number of mutual funds and find that fund A has generated excellent returns for the past 2 years and has a highly respected fund manager. You also find that fund B has earned slightly below-average returns for the past 5 years, is being advertised as a good buy, and is expected to break through and earn high returns in the upcoming year. Based on the efficient markets hypothesis, which fund should you choose? Explain.

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Answer #1

The efficient market hypothesis claims that asset prices would be a manifestation of all the available information about it. So, as new informations enter the securities market, the asset prices would be influenced by that. As a result, you can't generate higher returns by choice.

So, based on the efficient market hypothesis, we will be indifferent between the two funds because either way, no technical or fundamental analysis can help us to generate excess risk adjusted return.

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