Question

What would happen if everyone believed the market was efficient and didn’t bother to do any...

  1. What would happen if everyone believed the market was efficient and didn’t bother to do any research or analysis of stocks. In other words, they just bought a diversified portfolio and held it for the long-run. Would the market still be efficient? Why or why not? What does this say about the efficient markets hypothesis?

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Answer #1

If everyone believed in efficient markets, everyone would invest in the markets as a whole and not individual stocks. Since there is no research done by participants, the stocks which are undertaking valuable projects will not increase in value and the firms without any good source of revenue will be overvalued. Hence, there will be overvalued and undervalued stocks in the market and hence the markets will no longer be efficient. This tells us that the efficient market hypothesis is not entirely true. It might be true for some time but it can't be believed to be true all the time.

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