Answered: According to the efficient markets…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 6CQQ

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Question

According to the efficient markets hypothesis,
a. changes in stock prices are impossible to predict from public
information.
b. excessive diversification can reduce an investor's expected portfolio
returns.
c. the stock market moves based on the changing animal spirits of
investors.
d. actively managed mutual funds should give higher returns than index
funds.

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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