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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 explains that market absorbs all the information and shows in the financial instrument, depending upon the nature of efficiency of the market. On this basis, I would like to invest in Mutual fund B and assume that market is semi-strong form of efficient market. On this basis, market will quickly absorb the information and more people will demand for this mutual fund B. Hence, It will gain its value as mentioned in the coming 1 year. Hence, It is good to invest in mutual fund B and reap the reward of higher return.

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