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We have seen that over long periods, stock investments have tended to substantially outperform bond investments, However, it is common to observe investors with long horizons holding entirely bonds.

Are such investors irrational? No, stocks are riskier.

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Some investors are highly risk averse, and the extra possible return doesn't attract them relative to the extra risk. Explain why a characteristic of an efficent market is that investments in the market have zero NPVs.

On average, the only return that is earned is the required return—investors buy assets with returns in excess of the required return positive NPV , bidding up the price and thus causing the return to fall to the required return zero NPV ; investors sell assets with returns less than the required return negative NPV , driving the price lower and thus causing the return to rise to the required return zero NPV. A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days.

If this is true, what do you know about the market? The market is not weak form efficient.

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If a market is semistrong form efficient, is it also weak form efficient? Yes, historical information is also public information; weak form efficiency is a subset of semi-strong form efficiency.

Efficient Market Hypothesis (EMH)

What are the implications of the efficient markets hypothesis for investors who buy and sell stock in an attempt to "beat the market"? Ignoring trading costs, on average, such investors merely earn what the market offers; stock investments all have a zero NPV.

If trading costs exist, then these investors lose by the amount of the costs.