Question

Which of the following statements is true concerning the efficient market hypothesis? a. Equilibrium rates of...

Which of the following statements is true concerning the efficient market hypothesis?

a. Equilibrium rates of return prevail and securities sell at their "fair" value.

b. Equilibrium rates of return prevail.

c. Firms securities sell at their "fair" value.

d. Financial investors cannot earn a positive return.

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Answer #1

Answer: a (Equilibrium rates of return prevail and securities sell at their fair value)

If answer is multiple choice, b and c are also correct. In case of a single correct answer, only a will be marked.

Reason:

Why is (a) Correct?

According to the effecient market hypothesis, share prices reflect all information and it is impossible for investors to generate higher return by placing the trades at appropriate time or better selection of stocks. Thus, stocks do trade at their "Fair Value" and Equilibrium rates of return do prevail.

Why is (d) Incorrect?

Investors can earn a positive return. However, for earning a higher return, they will need to invest in riskier assets. In other words, the investors need to take higher risk to earn higher returns.

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