What does the "efficient market hypothesis" suggest?

The efficient market hypothesis (EMH) posits that asset prices in financial markets fully reflect all available information at any given time. This means that it is impossible for investors to achieve higher returns than average market returns on a risk-adjusted basis, given that any new information is quickly incorporated into the prices of securities. Consequently, under EMH, the only way to potentially achieve higher returns is to accept greater risk.

This theory is grounded in the assumption that the market participants are rational and that they act on all available information. Therefore, when new information becomes public, it is rapidly integrated into stock prices, ensuring that they reflect the true value of the underlying asset. This idea has significant implications for investment strategies; for instance, if the market is efficient, it makes active management strategies—like stock picking and market timing—less likely to succeed in consistently outperforming a market index.

In contrast, the other choices do not align with the core premise of the efficient market hypothesis. The notion that all investors have insider information contradicts the assumption of market efficiency, as insider trading would lead to price discrepancies that could be exploited. The idea that market crashes can be accurately predicted suggests a level of foresight that EMH disputes, while believing that investors can