What is a fundamental assumption about prices in traditional finance?

In traditional finance, a key fundamental assumption is that prices incorporate and reflect all available information. This principle is rooted in the Efficient Market Hypothesis (EMH), which posits that it is impossible to consistently achieve higher returns than the average market return on a risk-adjusted basis, because all relevant information is already reflected in asset prices. This means that any new information is quickly assimilated into the prices, making it challenging for investors to identify undervalued or overvalued securities based on publicly available data.

By assuming that prices reflect all available information, traditional finance suggests that markets are generally efficient. Market participants analyze public information, and traders make decisions based on this data, which in turn affects prices. If the assumption holds true, it indicates that active management strategies attempting to exploit mispriced securities may be less effective, as any discrepancies will be corrected rapidly due to market forces.

In this context, the other options do not capture the comprehensive nature of how prices operate in traditional finance. Although supply and demand play a role in price determination, they are not the sole factors influencing prices when considering all available information. Similarly, while investor sentiment can influence short-term price movements, the fundamental assumption emphasizes the incorporation of comprehensive information over emotional factors. Lastly, the