Your investment client asks for information concerning the benefits of active portfolio management. She is particularly interested in the question of whether active managers can be expected to consistently exploit inefficiencies in the capital markets to produce above-average returns without assuming higher risk.
The semistrong form of the efficient market hypothesis asserts that all publicly available information is rapidly and correctly reflected in securities prices. This implies that investors cannot expect to derive above-average profits from purchases made after information has become public because security prices already reflect the information’s full effects.
a. Identify and explain two examples of empirical evidence that tend to support the EMH implication stated above.
b. Identify and explain two examples of empirical evidence that tend to refute the EMH implication stated above,
c. Discuss reasons why an investor might choose not to index even if the markets were, in fact, semistrong-form efficient.
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