If the efficient markets hypothesis is true, then

Question

a. stocks tend to be overvalued.
b. the stock market is informationally efficient so stock prices should follow a random walk.
c. fundamental analysis is a valuable tool for increasing one's stock returns.
d. an index fund is a poor investment.
e. all of the above are true.

Answer 1

If the efficient markets hypothesis (EMH) is true, the correct statement would be:

b. the stock market is informationally efficient so stock prices should follow a random walk.

Here's a quick breakdown of the other options:

• a. stocks tend to be overvalued. This statement is not necessarily true under EMH. EMH suggests that stocks are fairly valued based on all available information.

• c. fundamental analysis is a valuable tool for increasing one's stock returns. Under EMH, particularly in its strong form, fundamental analysis would not provide an advantage since all available information is already reflected in stock prices.

• d. an index fund is a poor investment. This is not true if EMH holds; in fact, it would suggest that index funds are a good investment since they typically outperform actively managed funds over time due to lower fees and the efficiency of the market.

• e. all of the above are true. Since the previous statements are not true, this option cannot be accurate.

So, the most appropriate choice is b.