Question

Manuel and Poornima are building their portfolios. Manuel purchases shares in a mutual fund and pays fees to a manager who actively manages the mutual fund's portfolio. He does so because he believes that the manager can identify inexpensive stocks that will rise in value. Poornima is not convinced. She buys shares in an index fund-a type of mutual fund that simply buys all of the stocks in a given stock index rather than actively managing a portfolio. Manuel builds his portfolio on the supposition that:

a. The stock market exhibits informational efficiency.

b. Stock analysts can use fundamental analysis to identify undervalued stocks.

c. Stock prices follow a random walk.

Answer 1

B. Stock analysts can use fundamental analysis to identify undervalued stocks.