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Re: Inference based question [#permalink]
24 Aug 2011, 07:54
Many managers of mutual funds proclaim that they have been able to generate consistently higher rates of return on their investments than the general stock market bu buying shares of undervalued companies. Classical economic theory, however, proposes the "efficient capital markets hypothesis", which proposes that stock prices accurately reflect the value of the underlying investments, incorporating all information available to the public. if the efficient capital markets hypothesis is correct, then it should be expected that_____________.
A) mutual fund managers, in order to compete with each other, will bid up the prices of certain stocks beyond their true values - too extreme an option.
B) mutual fund managers use insider information, an illegal practice, to generate higher rates of return than the general stock market. again an extreme option. Always remember that we have to leave our emotions aside and use the information given in the passage only
C) stock price will rise over time - if this option were true, it would negate the classic economists theory that markets are efficient because if markets are efficient, the stock price is no more undervalued and hence may or may not rise
D) given public information alone, companies cannot reliably be labeled undervalued or overvalued relative to to the general stock market -this is the only one which is going with the classic economists theory and indicates that to pick undervalued stocks, fund managers need more information than is available to market.
E) some mutual fund managers are better than others at generating a higher rate of return on investments - -out of scope
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