Market efficiency is probably the most controversial concept in finance. Even recent winners of the Nobel Prize in Economics come down on opposite sides of the issue. Nonetheless, it is important for you to grapple with this idea. It has very important practical implications for investment decisions, including (especially) for your personal investment decision. In particular, should you pursue active or passive strategies? What types of active strategies might be worth paying for? How much should you pay? Are there ways to limit costly mistakes you might make when investing?

To help you refine your thoughts on this subject discuss the following questions. You should refer to what you have learned in class (from the textbook, lectures, etc) and from your own personal experiences whenever possible. Suppose that you are analyzing a stock that has a seasonal business (i.e., sales are consistently stronger during certain times of the year).

Would you expect the stock price to also follow a seasonal pattern? Why or why not?

Suppose money manager A has earned an average return of 12% over the past 5 years, while manager B has earned 8% over that span. The S&P 500 has returned 10% over the same period. There are 3 possibilities: 1) manager A outperformed manager B; 2) Manager B outperformed manager A; and 3) they performed equally well.

Explain how each scenario could be true. Is it possible to 'make money' in an efficient market? Be precise about what you mean by 'make money' because your response will depend on how you define this phrase.