Question

According to the efficient market hypothesis:

a. High-beta stocks are consistently overpriced.

b. Low-beta stocks are consistently overpriced.

c. Positive alphas on stocks will quickly disappear.

d. Negative-alpha stocks consistently yield low returns for arbitrageurs.

Solution

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According to the efficient market hypothesis stocks are always fairly priced based on all relevant and available information. A stock is never under or overpriced. With this in mind options a, b and d are all incorrect.

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