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

The correct answer is:

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

The efficient market hypothesis (EMH) suggests that all available information is already reflected in stock prices, making it impossible to consistently achieve higher returns than the overall market through stock selection or market timing. Therefore, fundamental analysis would not provide a consistent advantage, and index funds are generally considered a good investment strategy under EMH due to their low costs and diversification. Thus, options a, c, and d are incorrect in the context of EMH.