Question: Your friend, Jim Kramer, is telling you about a stock that he believes is extremely undervalued. He wants you to invest a large portion of your 401k in it. Assuming you believe the market is semistrong form market efficient, would you likely invest in Jim's undervalued stock pick, or an index fund that tracked the market? (Keep in mind that Jim does not have insider information.)
A. It doesn't matter because both Jim's security and the index fund have the same amount of risk, and markets are unpredictable.
B. Why does Jim believe the stock is undervalued? If his reasoning seems logical, then it might be worth investing in the stock
because the current price might not reflect all public information, and the stock might be undervalued.
C. Invest in an index fund because markets are efficient, and the current price reflects all public information.
D. Invest in Jim's undervalued stock because markets are inefficient, the current price might not reflect all public information, and the stock might be undervalued.