Question

Which of the two arguments (answers to question 1 and question 2) do you believe more? Why? Explain. (There no wrong answer here as long as you explain your answer well).

1. Make an argument for why the U.S. stock market is efficient.

2. Make an argument for why the U.S. stock market is inefficient.

Answer 1

1) The argument to suggest that US markets are efficient is that over long periods of time (i.e. for periods more than 10/15 years), most actively managed US funds (about 90%) have failed to beat the benchmark. This is a sign that the US capital markets are efficient and finding any alpha by actively managed funds is difficult.

2) While it is true that over long periods of time, it is difficult to beat the market index, however through high frequency trading it has been possible to identify arbritrage opportunities and capitalise on them. These are specialised fund managers who take the advantage of high frequency trading to fulfill the needs of creating extra return and this is a good indication of the fact that US markets are not completely efficient.

Of the two arguments presented above, I would believe in argument number 1 which says that US markets are efficient as there are enough statistics to show that over long period of time index funds have proved to be superior than the actively managed one and this clearly goes to show the market efficiency of the overall system.