Eminent financial economist John Cochrane notes that the evidence shows that "high valuations are, on average, followed by many years of poor returns, and vice versa. High valuations are not, on average, followed by years of good cash-flow growth, or by ever-higher valuations."  

 

 

a) Do these findings contradict the efficient market hypothesis?   Why or why not? 

b) Explain the theory behind the saying that that the market is efficient because of "the wisdom of the crowd".  

Does this imply that in an efficient market we can always understand why prices are at the level they happen to be or always understand the reasons for changes in price?

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a The findings do not necessarily contradict the efficient market hypothesis The efficient market hy... View the full answer