Which investment strategy aligns with the efficient market hypothesis?

Which investment strategy aligns with the efficient market hypothesis?

• A. Using fundamental analysis to compare calculated and market values.
• B. Attempting to predict the overall direction of markets.
• C. Selecting a random set of stocks for a portfolio.
• D. Searching for undervalued securities.

Answer: (C)

The efficient market hypothesis (EMH) posits that all available information is already reflected in stock prices, meaning that it is impossible to consistently achieve higher returns than average market returns on a risk-adjusted basis. In this context, selecting a random set of stocks for a portfolio aligns well with the EMH because it suggests that since prices already incorporate all relevant information, it doesn't matter which stocks are picked - the performance will essentially mirror that of the market. This approach takes the position that it's not possible to outperform the market through specific stock selection or market timing, which is consistent with the beliefs of the EMH. Therefore, the strategy of assembling a portfolio of stocks without regard to their individual characteristics is a reflection of the idea that the market is efficient, and all securities are fairly priced. In contrast, the other strategies involve attempts to analyze or predict market performance, which assumes that one can identify mispriced securities or overall market trends. This inherently conflicts with the tenets of the EMH, which suggests that any available information is already accounted for in current prices, thus making it difficult to profit from these strategies consistently.

The efficient market hypothesis (EMH) posits that all available information is already reflected in stock prices, meaning that it is impossible to consistently achieve higher returns than average market returns on a risk-adjusted basis. In this context, selecting a random set of stocks for a portfolio aligns well with the EMH because it suggests that since prices already incorporate all relevant information, it doesn't matter which stocks are picked - the performance will essentially mirror that of the market.

This approach takes the position that it's not possible to outperform the market through specific stock selection or market timing, which is consistent with the beliefs of the EMH. Therefore, the strategy of assembling a portfolio of stocks without regard to their individual characteristics is a reflection of the idea that the market is efficient, and all securities are fairly priced.

In contrast, the other strategies involve attempts to analyze or predict market performance, which assumes that one can identify mispriced securities or overall market trends. This inherently conflicts with the tenets of the EMH, which suggests that any available information is already accounted for in current prices, thus making it difficult to profit from these strategies consistently.