What does the efficient market hypothesis suggest about stock prices?

The efficient market hypothesis (EMH) asserts that stock prices fully reflect all available information at any given time. This means that all known information about a company—including its financial performance, industry conditions, and macroeconomic factors—is accounted for in the stock's price. As a result, investors cannot consistently achieve higher returns than the overall market by using this information, as it is already incorporated into the current stock price.

The foundation of EMH relies on the assumption that investors act rationally and that markets are efficient, meaning that information is disseminated quickly and incorporated into prices almost instantaneously. Therefore, in an efficient market, it is deemed impossible to "beat the market" consistently, as any new information that could lead to a price change is rapidly reflected in stock prices.

In contrast, the other choices do not encapsulate the core concept of the efficient market hypothesis. Some suggest that stock prices depend on dividends, imply a slow adjustment to new information, or assert that prices are completely arbitrary—none of which align with the principles of market efficiency.