Question

In: Economics

1. The Coronavirus Pandemic is an unprecedented event that has affected our lives in an extraordinary...

1. The Coronavirus Pandemic is an unprecedented event that has affected our lives in an extraordinary way. We can see its effects on our economy as well. Due to the pandemic, majority of the stock prices are plummeting. Savers who are holding these stocks are observing major declines in the value of their portfolios. Can savers have better outcomes in their stock market portfolios by changing the stocks they own? What would Efficient Market Hypothesis say about this? Start with explaining clearly what Efficient Market Hypothesis is.  

Solutions

Expert Solution

Efficient Market Hypothesis or Efficient Market Theory says that the Market is very efficient and stock prices reflect all the available information for the stocks.
It is not possible for the fund managers or portfolio managers or investors to earn the returns over and above the market returns unless the take very high risk then the market risk and invest in very risky assets.
The current pandemic has caused many stock markets across the world to decline significantly. Many investors who are invested in the stocks have seen their investment values go down significantly.
Yes the savers can have better outcomes by changing their portfolios. Because every time the stock markets decline at such velocity , history says they are followed by the major pullback however when the markets resume the uptrend the sectors that outperform may not be the same sector who participated in the previous bull run. So investors are better off rotating their investments in sectors who are likely to benefit more after the current crisis are over.


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