Which of the following statements is true if the efficient market hypothesis holds?

• A. Insider trading is the only way to earn profits in financial markets.
• B. Investors can consistently achieve above-average returns by analyzing past price movements.
• C. All available information is already reflected in asset prices.
• D. Market prices are always set below their intrinsic values.

Answer: (C)

Verified step by step guidance

1. Understand the Efficient Market Hypothesis (EMH): It states that asset prices fully reflect all available information at any point in time.
2. Analyze each statement in the context of EMH: If EMH holds, no investor can consistently achieve above-average returns using available information because prices already incorporate that information.
3. Evaluate the statement about insider trading: While insider trading involves private information, EMH assumes that publicly available information is already reflected in prices, so only truly private information might yield abnormal profits.
4. Consider the statement about analyzing past price movements: Under EMH, especially the weak form, past price data is already reflected in current prices, so technical analysis should not consistently yield excess returns.
5. Assess the statement about market prices being below intrinsic values: EMH implies prices reflect intrinsic values on average, so prices are not systematically set below intrinsic values.