Question

If you believe the efficient market hypothesis is true then which of the following investments would make the most sense?

		Invest in a hedge fund that beat the S&P 500 index last year.
		Invest in a Turkish stock fund due to their historically low market valuation.
		Invest in an S&P 500 Index mutual fund.
		Invest in Berkshire-Hathaway Class B shares because Warren Buffett runs it.

Answer 1

Option c) Investing in an S&P 500 index mutual fund makes the most sense if you believe in the efficient market hypothesis.

The efficient market hypothesis states that all the share prices reflect all the publicly available information and that no additional returns can be generated consistently through active management.

Investment in an S&P 500 index mutual fund (which is a representative of the U.S. stock market) is a passive investment.

All the other answer choices are active management investments and thus cannot beat the market according to the efficient market hypothesis and hence incorrect.

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