Suppose I pick an index of the American stock market -- the S&P 500, and an index of the Japanese market -- the Nikkei 225. Suppose for a moment that I expect the amount of risk in each index to be roughly the same.
Should I expect equal returns from both indices?
On one hand, I might think "no", since stagnating population and demographic issues in Japan have been reflected in the fact that Nikkei 225 index is lower now than it was 30 years ago.
On the other hand, I might also be tempted to think "yes", because if it was really true that we can't expect steady economic growth from Japan anymore, but we can from America, then people holding japanese stock should've sold them in exchange for american stock, depressing the price until the expected returns were equal again. If the expected growth rate were lower than the risk free rate, then the price should drop to 0. In other words if the EMH prevents me from beating the market, it should also prevent me from losing to it.
Which of these lines of thought is correct?