Which of the following is the best statement of the 'efficient markets hypothesis'?
A)Investor's decisions are dependent on complete current information of a firm's cash flows and accurate predictions of future cash flows.
B)Investors with information that a share has a positive net present value (NPV)will buy it, while investors with information that a share has a negative net present value (NPV)will sell it.
C)Competition between investors works to make the net present value (NPV)of all trading opportunities zero.
D)A share's price is the aggregate of the information of many investors.

Question

Quizplus · Accepted Answer

The efficient markets hypothesis states that competition between investors works to make the net present value (NPV) of all trading opportunities zero. This means that the current price of a share already reflects all available information, making it impossible for investors to consistently earn a return above the market average through trading. Therefore, the market is said to be efficient, and attempting to outperform it through stock picking or market timing is pointless. Option A is too narrow as it only focuses on a single aspect of investor decision-making, while option B is only a partial explanation of how information is reflected in stock prices. Option D, although related, does not capture the core idea of market efficiency as a result of competition among many investors.

Which of the Following Is the Best Statement of the 'Efficient