What is the primary claim of the Efficient Market Hypothesis?

What is the primary claim of the Efficient Market Hypothesis?

• A. Securities' prices reflect all available information
• B. Abnormal gains and losses are minimized
• C. Prices reflect company size
• D. Markets are always perfectly efficient

Answer: (A)

The main idea behind the Efficient Market Hypothesis is that securities’ prices fully reflect all available information. When new information appears, markets adjust quickly, and prices incorporate that information almost immediately, so you can’t reliably earn excess returns by trading on public data after accounting for risk and costs. This means only unexpected news—information not yet known—causes price movements, rather than patterns you might try to exploit from public analysis. The other statements miss the point: EMH doesn’t claim that abnormal gains and losses are minimized, nor that prices depend on company size in a foundational way, and it doesn’t say markets are always perfectly efficient—there are different forms and practical frictions that can create temporary inefficiencies.

The main idea behind the Efficient Market Hypothesis is that securities’ prices fully reflect all available information. When new information appears, markets adjust quickly, and prices incorporate that information almost immediately, so you can’t reliably earn excess returns by trading on public data after accounting for risk and costs. This means only unexpected news—information not yet known—causes price movements, rather than patterns you might try to exploit from public analysis. The other statements miss the point: EMH doesn’t claim that abnormal gains and losses are minimized, nor that prices depend on company size in a foundational way, and it doesn’t say markets are always perfectly efficient—there are different forms and practical frictions that can create temporary inefficiencies.