What is the fundamental principle behind the Efficient Market Hypothesis (EMH)?

The fundamental principle behind the Efficient Market Hypothesis (EMH) is that all available information is already reflected in asset prices, which suggests that it is very difficult for investors to achieve consistent outperformance, particularly through technical or fundamental analysis. This idea is rooted in the notion that securities are priced correctly based on the collective knowledge and information of all market participants.

When all available information—whether it's historical data, news, or economic indicators—is efficiently disseminated and incorporated into asset prices, it follows that no single investor can have an advantage over another in predicting price movements. Therefore, if the market is indeed efficient, consistently outperforming the market becomes highly unlikely, as any new information will quickly be absorbed into the prices, leaving little room for arbitrage opportunities.

The other options do not align with the core tenets of EMH. For instance, predicting market prices based on historical data contradicts the EMH, as it assumes past information is already priced in and not valuable for future predictions. The assumption that investors are always rational also does not hold true in reality; behavioral finance reveals that emotions and cognitive biases can significantly influence decision-making. Lastly, the idea that asset prices react slowly to new information suggests inefficiency, which directly opposes the premise