What does market efficiency indicate?

Market efficiency indicates how well prices reflect available information. In an efficient market, all relevant information is quickly and accurately incorporated into asset prices. This means that the current price of a security is deemed to represent its true value based on all known factors. If markets are efficient, then it's difficult for investors to achieve higher returns than the average market return on a risk-adjusted basis because any new information that could affect a security's price is already reflected in that price.

The concept of market efficiency is closely associated with the Efficient Market Hypothesis, which posits that it is impossible to "beat the market" consistently on a risk-adjusted basis since prices already incorporate and reflect all relevant information. This is crucial for investors to understand, as it has implications for investment strategies and expectations regarding market returns.

Other options touch on important aspects of market behavior, but they do not capture the core meaning of market efficiency as effectively. For instance, while the speed at which markets react to news is a factor that contributes to market efficiency, the concept is more fundamentally about how accurately prices reflect all available information. Reliability of trading systems and profitability of market investments are related to market activities but do not directly define market efficiency itself.