Question

Assume that financial markets are efficient. How could an efficient market impact the average investor? Discuss.

Answer 1

If the financial markets are efficient than the probability of making excess rate of return will be completely nullified, so investors will not be looking for the financial markets to be inefficient because in efficiency will help them to make a higher rate of return.

Average investors are always looking for rate of return which can beat the inflation and they will be not able to invest in a specific assets in order to outperform the market because nobody can outperform the market in the Efficient market and all the informations have already been discounted into the stock price and there is no scope for making any excess rate of return than the market rate of return so investor will always be trying to copy the index rate of return and he will be opting for the passive management of the funds.

It can overall better the perspective of average investor because he will make a better rate of return than other actively managed portfolio as efficiency of market will help him in order to maintain a proper diversified portfolio which are constantly matching the rate of return of market so it will also reduce the overall cost of management of the portfolio and it will also reduce the risk of the average investor and it will also reduce any kind of risk related to inefficiency the market and hence the average investor will be in a better situation when the market will be efficient because he will be able to match the rate of return of the market.