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Princeton University’s Burton Malkiel is the high prophet of efficient markets theory. His Random Walk Down Wall Street, which has probably been read by virtually all the attendees at the CFA Conference, sets out the case for efficient markets very clearly - market prices at all times attempt to incorporate all available information.

It follows that stocks will follow a “random walk,” bouncing around in response to news, and that it will be impossible to beat the market with any consistency. This in turn provided the theoretical underpinning for index funds.

But Malkiel is now encouraging people to invest in China, which he regards as a strong opportunity for growth. Aren’t all the factors that should make us bullish about China and its secular growth already reflected in the price?

“Even within efficient markets, nobody ever said that taking on more risk shouldn’t give you a higher rate of returnille,” Malkiel replied. He went on to admit that a number of big Chinese companies are “clearly” risky investments. There are also problems with liqudity. “You get paid for bearing illiquidity, and you get paid for bearing risk as well.”

He adds to this that China’s domestic A-share markets are plainly still inefficient (companies can be quoted for much more there than they are in Hong Kong or New York), and that the world’s investors are under-exposed to China. It accounts for anything between 5 and 10 per cent of world GDP, depending on assumptions about exchange rates, and yet most global stock indices have an expposure of only about 1 per cent to China.

Put all this together, and he can justify investing in China through index funds.

What of the increasing volume of complaints against the efficient markets theory itself? Behavioural economists have been indentifying numerous repetitive market inefficiencies that can be attributed to ways in which humans are predictably irrational. A popular new model uses Darwinian evolutionary theory to suggest that markets are “adaptive,” steadily moving from one state to another as they gain information, but not walking randomly. Still others attempt to junk the entire notion of efficiency.

Malkiel is sticking to his guns. “I think behavioural finance is actually very important. We are ruled by emotion and there are mistakes that we all make. We are overconfident for example, and I think you can avoid some mistakes by heeding the lessons of behavioural finance.

“But there’s nothing I have seen that suggests to me that any of these things, whether they are adaptive models or behavioural models, give you a way to beat the market.”

He went further. “In all of the empirical work on investors and mutual funds, I see no reason to change my views that if I want to predict how a manager is going to do, the most dependable things I find are the expense ratio and the portfolio turnover.”

The more a manager charges in expenses, and the more they turn over their portfolio (incurring expenses) the worse their performance will be. This is exactly what would be predicted if stocks followed a random walk.

So although Malkiel is making a great leap to China, he has not abandoned his random walk down Wall Street.

Short View columnist John Authers is blogging for FT Alphaville from Vancouver at the annual gathering of the CFA Institute