Historical returns support which one of the following statements?
A)Financial markets are highly inefficient as suggested by behavioral finance.
B)Professional money managers tend to outperform the Vanguard 500 index fund about 55 percent of the time on average.
C)The longer the time span, the more apt a professional money manager is to outperform an index fund, such as the S&P 500.
D)Historical data supports the statement that arbitrage is unlimited and results in a totally efficient market.
E)The financial markets appear to be efficient because, on average, they outperform professional money managers.

Question

Quizplus · Accepted Answer

Historical returns support the idea that financial markets are efficient, as on average they outperform professional money managers. This is consistent with the efficient market hypothesis which suggests that all available information is reflected in asset prices, making it difficult for active managers to consistently beat the market. Option A is incorrect as historical returns actually contradict the behavioral finance perspective that markets are highly inefficient. Option B is incorrect as studies have shown that active managers tend to underperform passive index funds over the long term. Option C is also incorrect as studies have shown that the longer the time horizon, the less likely active managers are to outperform their benchmark. Option D is incorrect as historical data does not support the idea of a totally efficient market due to the existence of market frictions and imperfect information.

Historical Returns Support Which One of the Following Statements