What investment strategy aligns with the efficient market hypothesis?

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Multiple Choice

What investment strategy aligns with the efficient market hypothesis?

The efficient market hypothesis (EMH) posits that all available information is already reflected in the prices of securities. Therefore, it suggests that beating the market consistently through analysis or selection techniques is nearly impossible. Given this hypothesis, selecting a random set of stocks for a portfolio aligns well with EMH because it acknowledges that trying to pick individual winners based on past performance or undervalued status is generally ineffective. Under the EMH, it's assumed that all known information is already embedded in stock prices, which makes the market efficient. Consequently, a random selection does not attempt to outsmart the market; rather, it embraces the notion that diversifying across a wide range of stocks is a sound strategy in a market that is inherently unpredictable. This approach minimizes the assumption of being able to identify which securities will outperform. In contrast, searching for undervalued securities and comparing the calculated value of a security to the market value both imply an effort to analyze and identify mispriced assets, suggesting that the investor believes they can outperform the market with that knowledge. Additionally, waiting for a stock to cross above a certain technical indicator, like the 40-day moving average, reflects a strategy that depends on market trends and signals, which assumes some predictive power that contradicts

The efficient market hypothesis (EMH) posits that all available information is already reflected in the prices of securities. Therefore, it suggests that beating the market consistently through analysis or selection techniques is nearly impossible. Given this hypothesis, selecting a random set of stocks for a portfolio aligns well with EMH because it acknowledges that trying to pick individual winners based on past performance or undervalued status is generally ineffective.

Under the EMH, it's assumed that all known information is already embedded in stock prices, which makes the market efficient. Consequently, a random selection does not attempt to outsmart the market; rather, it embraces the notion that diversifying across a wide range of stocks is a sound strategy in a market that is inherently unpredictable. This approach minimizes the assumption of being able to identify which securities will outperform.

In contrast, searching for undervalued securities and comparing the calculated value of a security to the market value both imply an effort to analyze and identify mispriced assets, suggesting that the investor believes they can outperform the market with that knowledge. Additionally, waiting for a stock to cross above a certain technical indicator, like the 40-day moving average, reflects a strategy that depends on market trends and signals, which assumes some predictive power that contradicts

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