Question

With your knowledge on the Efficient Market Hypothesis answer to the following questions:

Suppose you want to study the aerospace industry to invest your money in it. Your studies show that the industry has had some steady growth and has never missed dividend payments in the past 100 years. Does it make the stocks in this industry attractive enough for you to use in your portfolio? Why and why not?

Answer 1

Efficient market hypothesis- EMH says that share price reflects all the necessary information. This theory says that stocks always trade at their fair value and people who buy undervalued stocks and keep it for longer term, always get goo returns, stock market is risky and uncertain, people who take more risk, gains more. It is not possible to outperform the overall market. The only way, investors can get higher returns by investing into risky securities. No theory works in stock market, one insider or big news is enough to take the prices of securities down.

If I am looking into Aerospace industry to invest and it has steady growth and also paying handsome dividend then these are the good triggers for me to invest into this industry. People in developing countries are now more travelling via air, there is need of aeroplanes in the current time. People want to travel via air for longer distance, this industry will do good in the future. If I will not get much capital appreciation, I will at least get regular income in the form of dividend.