Which of the following statements about the efficient markets hypothesis is correct?

• A. It assumes that government intervention is necessary for markets to be efficient.
• B. It can hold even if some investors are not rational, as long as market prices reflect all available information.
• C. It holds only if all investors are rational.
• D. It requires that all investors have identical preferences.

Answer: (B)

Verified step by step guidance

1. Understand the Efficient Markets Hypothesis (EMH): EMH states that asset prices fully reflect all available information, meaning that it is impossible to consistently achieve higher returns than the overall market through stock picking or market timing.
2. Analyze the assumption about investor rationality: EMH does not require that all investors be perfectly rational. Instead, it allows for some investors to be irrational as long as their effects are offset by rational investors who act on available information.
3. Consider the role of government intervention: EMH does not assume that government intervention is necessary for markets to be efficient. Market efficiency arises from the collective actions of investors processing information.
4. Evaluate the requirement about investor preferences: EMH does not require all investors to have identical preferences. Differences in preferences do not prevent prices from reflecting all available information.
5. Conclude that the correct statement is that EMH can hold even if some investors are not rational, as long as market prices reflect all available information.