Which of the following statements are true in context of efficient market?

A. Equilibrium rates of return will prevail
B. Investor cannot earn a positive return
C. Volatility will be very high
D. Securities of listed firms sell at their fair values
E. Investors are generally risk-averse

Choose the most appropriate answer from the options given below:

Correct option is A

The Efficient Market Hypothesis (EMH) states that financial markets are “informationally efficient,” meaning that all available information is fully reflected in asset prices. In such markets:

• A. Equilibrium rates of return will prevail: In an efficient market, prices adjust rapidly to new information. This leads to equilibrium where expected returns are consistent with the risk levels of securities.

• D. Securities of listed firms sell at their fair values: According to EMH, all publicly available information is already incorporated into stock prices. Therefore, listed securities consistently trade close to their intrinsic value, preventing persistent under- or overvaluation.

Thus, statements A and D align with the core principles of efficient markets.

Information Booster:

• Prices reflect all available information, so no investor can consistently outperform the market without taking extra risk.

• Equilibrium returns exist where investors are compensated for risk taken, not due to superior information.

• Fair value pricing ensures that arbitrage opportunities are minimal or non-existent.

• EMH supports three forms: weak, semi-strong, and strong, depending on the information type reflected in prices.

• Informed and uninformed investors both play roles in maintaining efficiency through trading activities.

• Technical and fundamental analysis have limited usefulness in a truly efficient market.

• Despite market anomalies, long-term trends often align with the efficient market assumptions.

Additional Knowledge:

B. Investor cannot earn a positive return: Investors can earn positive returns in an efficient market. What they cannot do consistently is earn abnormal returns (returns above the risk-adjusted expected rate) through prediction or market timing.

C. Volatility will be very high: Efficiency doesn't imply high volatility. Volatility depends on the flow of new information and investor reaction. While volatility may exist, it’s not a defining characteristic of market efficiency.

E. Investors are generally risk-averse: While this may be true in general finance theory, investor risk aversion is not a defining element of market efficiency. It is an assumption in utility theory or portfolio theory, but not a condition for EMH.