What is the efficient market hypothesis (EMH)?

The efficient market hypothesis (EMH) asserts that financial markets are efficient in reflecting all known information in the pricing of securities. This means that at any given time, stock prices incorporate and reflect all relevant information available to investors. Consequently, since all known information is priced into the stocks, it becomes impossible for investors to consistently achieve returns that outperform the market average on a risk-adjusted basis, as any potential advantage is quickly exploited by other market participants.

This concept is fundamental in understanding how market dynamics work and suggests that active trading strategies or attempts to time the market will likely not yield returns superior to simply holding a diversified portfolio. It challenges the notion that investors can "beat the market" consistently through either technical or fundamental analysis, thus emphasizing the randomness of price movements based on new information entering the market.

While other choices touch on aspects related to market behavior or analysis techniques, they do not encapsulate the core premise of the efficient market hypothesis as thoroughly as the correct answer does.