6

Set 1: Central Ideas (Advanced)

Explanation

Answer: B

PASSAGE

The following text describes the 'Efficient Market Hypothesis' (EMH). The Efficient Market Hypothesis (EMH) asserts that financial markets are 'informationally efficient,' meaning that asset prices reflect all available information. Consequently, it should be impossible to consistently 'beat the market' on a risk-adjusted basis, since market prices should only react to new information. Critics point to phenomena like asset bubbles and crashes—instances where prices deviate significantly from intrinsic value—as evidence that behavioral psychology and irrational exuberance play a larger role than EMH admits.

What is the core implication of the Efficient Market Hypothesis regarding investment strategy?

A. Investors can easily predict future price movements by analyzing past trends
B. It is impossible to consistently outperform the market because prices already reflect all data✓ Correct
C. Asset bubbles are a frequent and predictable occurrence
D. Government regulation is necessary to ensure fair pricing

Detailed Explanation

Choice B is correct. The text states: 'it should be impossible to consistently beat the market... since market prices should only react to new information.'

Key Evidence:

• "impossible to consistently 'beat the market'"

• "asset prices reflect all available information"

Why others are wrong: A (Opposite (Technical Analysis view, rejected by EMH)), C (Opposite (Critics point to bubbles as evidence AGAINST EMH)), D (Not mentioned).

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