What is a practical implication of the Efficient Market Hypothesis for investors?

What is a practical implication of the Efficient Market Hypothesis for investors?

• A. Active management may have limited ability to outperform on a risk-adjusted basis.
• B. Active management always outperforms passive strategies.
• C. There is no risk in markets.
• D. Markets are always mispriced.

Answer: (A)

In markets where prices reflect all available information, it’s very hard to beat the overall market consistently through stock picking or timing. The practical upshot is that active management often can’t outperform on a risk-adjusted basis once you account for fees, taxes, and trading costs. Because managers charge for their skill, any potential extra returns tend to be erased, making low-cost passive strategies like broad index funds a sensible choice for many investors. This perspective also keeps in mind that risk in the market still exists and isn’t eliminated, and occasional mispricings may occur but aren’t reliably exploitable.

In markets where prices reflect all available information, it’s very hard to beat the overall market consistently through stock picking or timing. The practical upshot is that active management often can’t outperform on a risk-adjusted basis once you account for fees, taxes, and trading costs. Because managers charge for their skill, any potential extra returns tend to be erased, making low-cost passive strategies like broad index funds a sensible choice for many investors. This perspective also keeps in mind that risk in the market still exists and isn’t eliminated, and occasional mispricings may occur but aren’t reliably exploitable.