The efficient market hypothesis holds that asset prices reflect all available information, making it impossible to consistently 'beat the market.' Evidence for this includes the failure of most actively managed funds to outperform passive index funds over time. However, the 2008 financial crisis revealed systematic mispricing of mortgage-backed securities. Defenders argue the crisis was caused by distorted information, not market irrationality—the market efficiently processed false data.
The passage suggests that
all actively managed funds outperform index funds
the 2008 financial crisis definitively disproved efficient markets
evaluating economic theories may require distinguishing between the quality of information and the rationality of processing
mortgage-backed securities were accurately priced before 2008
Correct Answer: C
Choice C is the best answer. The defense distinguishes bad information from irrational processing.
- Context clues: Critics cite mispricing; defenders say the market "efficiently processed false data."
- Meaning: The debate hinges on separating information quality from processing rationality.
- Verify: Understanding whether markets failed requires this distinction.
💡 Strategy: When a defense introduces a new distinction, infer that distinction is analytically important.
Choice A is incorrect because most actively managed funds fail to outperform. Choice B is incorrect because defenders offer an alternative explanation. Choice D is incorrect because "systematic mispricing" is acknowledged.