In eﬃcient markets, investments have an expected NPV equal to zero.

Question

Quizplus · Accepted Answer

In efficient markets, all available information is already incorporated into the prices of assets, and therefore the expected NPV of investments is zero. This is because any positive NPV opportunities will be quickly identified and capitalized on by market participants, driving up the price and resulting in a lower expected return. Similarly, any negative NPV opportunities will be avoided and drive down the price, resulting in a higher expected return. Therefore, in a efficient market, the expected NPV of all investments are equal to zero.

In Eﬃcient Markets, Investments Have an Expected NPV Equal to Zero