Question

If the financial markets are highly efficient, then:
a. investing based on technical analysis is highly recommended.
b. holding a diversified, low-cost, passively-managed portfolio is probably your best investment strategy.
c. you should adopt an investment strategy based on market timing.
d. having a professional manager who actively trades your portfolio is most likely your best investment strategy.
e. it doesn't matter which securities you invest in as all securities will provide relatively equal returns.

Answer 1

Choice (b) is correct. Market efficiency entails unpredictable stock prices in the market. Since there is a higher risk of investment losses in an unpredictable stock prices change, the best investment strategy is to diversify portfolio so as to minimize loss on the other stock while maximizing gain from another.

Answer 2

In my opinion, when financial markets are highly efficient, then we have to do lot more trades than usual to earn most of the money out of it. So option D is the correct answer which suggests that having a professional manager who actively trades your portfolio is most likely the best investment strategy.

When financial markets are efficient, we need to put more and more trades, and with the help of a professional financial analyst, we can increase the volume of our trades and make more money in the volatile efficient market. Though the risks are also high, but high risk high return is always the policy for people who are seeking higher rewards.