The Efficient Market Hypothesis (EMH) is a concept in financial economics suggesting that markets efficiently incorporate all available information into asset prices. This means that consistently achi
The Efficient Market Hypothesis (EMH) is a concept in financial economics suggesting that markets efficiently incorporate all available information into asset prices. This means that consistently achieving higher-than-average returns through methods like stock picking or market timing is highly unlikely, as prices already reflect all known information.
In terms of investor behavior, EMH does not assume that every investor makes rational choices (option B), nor does it rely on some investors acting irrationally (option C). Instead, the focus is on the efficiency of the market as a whole, indicating that market prices rationally represent all available information, which corresponds with option A.
Put simply, EMH proposes that market prices quickly adjust to new data, making it difficult for investors to consistently beat the market by exploiting pricing errors. It doesn’t require specific assumptions about individual investors’ rationality but centers on the idea that the market efficiently processes information.
Madhusudan Chandarasekaran, CFA, FRM