What is the "efficient market hypothesis"?

The efficient market hypothesis (EMH) is a concept in financial economics that posits that asset prices in financial markets reflect all available information at any given time. This means that it is virtually impossible to consistently achieve higher returns than the average market return on a risk-adjusted basis, as any new information is quickly incorporated into asset prices. Therefore, under the EMH, investors are unable to "beat the market" through expert selection or market timing because price movements are driven by the information embedded in the market.

This theory suggests three forms of market efficiency: weak, semi-strong, and strong, which differ in the types of information reflected in asset prices—historical prices, public information, and all insider information, respectively. The key takeaway is the assertion that the market is efficient, and prices accurately represent the true value of securities, thereby guiding investment decisions.

This comprehensive understanding of the EMH underlines why it is considered the appropriate answer in this context.