Which of the following best defines the Efficient Market Hypothesis (EMH)?

• A. The EMH states that government intervention is necessary to correct market failures and ensure efficient allocation of resources.
• B. The EMH states that asset prices fully reflect all available information, making it impossible to consistently achieve higher returns than the overall market through expert stock selection or market timing.
• C. The EMH states that only historical prices are used to determine future asset values.
• D. The EMH states that markets are always in equilibrium and prices never change.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the Efficient Market Hypothesis (EMH) as a concept in financial economics that relates to how information is reflected in asset prices.
2. Step 2: Recognize that EMH asserts that asset prices incorporate all available information, meaning that no investor can consistently achieve returns higher than the overall market by using that information.
3. Step 3: Note that EMH implies that attempts to outperform the market through expert stock selection or market timing are generally futile because prices already reflect known information.
4. Step 4: Differentiate EMH from other statements: it does not claim that government intervention is necessary, nor that only historical prices determine future values, nor that prices never change.
5. Step 5: Conclude that the best definition of EMH is the one stating that asset prices fully reflect all available information, making it impossible to consistently outperform the market.