Key Concepts And Explanations Of The Efficient Market Hypothesis

So according to the Efficient Market Theory it is impossible for any investor to “beat the market” that is earn more profit or get more return than what the market is actually offering. Therefore the investor can only earn greater profits on his investment if the investment portfolio includes a high proportion of risky investments that is those with higher standard deviations and betas but with a good capability of yielding high returns as well (Stephens, C.R., 2010).

Chapter seven: What does the efficient market theory have to do with Financial markets? Discuss the positives and negatives of the theory. Why do Wall-Street types not like it? Explain the coin flipping experiment, as it relates to investment diversification.

As our discussion of market efficiency suggested, identifying mispriced securities is not easy. Yet there are enough chinks in the efficient market hypothesis and hence the search for mispriced securities cannot be dismissed out of hand. Moreover, remember that is

The Efficient-Market Hypothesis (EMH) states that it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Another concern relates of insider trading of market efficiency of stock market. In his classical study Fama (1970) proposes efficient market Hypothesis, which suggests that stock price reflects all available information (historical price, public and private) in

Efficient Market Hypothesis has been controversial issues among researcher for decades. Until now, there is no united conclusion whether capital markets are efficiency or not. In 1960s, Fama (1970) believed that market is very efficient despite there are some trivial contradicted tests. Until recently, both empirical and theatrical efficient market hypothesis was being disputed by behavior finance economist. They have found that investor have psychological biases and found evidences that some stocks outperform other stocks. Moreover, there are evidences prove that market are not efficient for instance financial crisis, stock market bubble, and some investor can earn abnormal return which happening regularly in stock markets all over the world. Therefore, the purpose of this essay is to demonstrate that Efficient Market Hypothesis in stock (capital) markets does not exist in the real world by proofing four outstanding unrealistic conditions that make market efficient: information is widely available and cost-free, investor are rational, independent and unbiased, There is no liquidity problem in stock market, and finally stock prices has no pattern.

Last but not least important, an efficient capital market is one in which stock prices fully reflect all available information. However, the paradox is that since information is reflected in security prices quickly, knowing information when it is released does an investor little good. Furthermore, it is impossible to create a portfolio which would earn extraordinary risk adjusted return. As a consequence, all the technical and fundamental analysis are useless, no one can consistently outperform the market, and new

The random walk theory is a financial theory asserting that stock market prices change randomly and no one can predict their trends of patterns (Brealey et al., 2012). Bachelier first proposed the concept of the random walk theory in 1900 (Fama, 1970). However, it is well-known by Kendall in 1953 (Brealey et al., 2012). The Efficient Markets Hypothesis was developed by Fama in 1970 (Fama, 1970). In his paper, he defined

EFFICIENT MARKET HYPOTHESISName: Mamunur Rahman Introduction Efficient Market Hypothesis (EMH) is a concept that was developed in 1960 's Ph.D. dissertation that was presented by Eugene Fama. The efficient market hypothesis states that, in a liquid market, the price of the securities reflects all the available information. The EMH exists in various degrees that include weak, semi-strong and strong, denoting the inclusion of non-public information in the market price. The theory contends that notion that it is possible to outperform the market. This is so because the market value contains all the available information and thus such attempts are chances and not skills. The weak EMH indicates that the market prices fully reflect all the

Semi-strong form EMH is reflecting all publicy available information. It assumes stock adjust quickly to absorb new information. It also incorporate weak-form EMH. Stock prices reflect all new available information. And those investors will purchase stock after new information released. But the investor cannot benefit over market by trading on new information. And it is risk-adjusted return. Semi-strong form is mostly supported by empirical evidence. Notion of semi-strong efficiency are strongly supported by the evidence, but occasional studies as those identifying market anomalies including the small-firm effect and the January effect and events like stock market crash of October 19, 1987 are inconsistent with this form of market efficiency. Black suggests that most so-called "anomalies" result from data

Over time there have been many different theories applied to financial markets which attempt to explain the changes of stock prices and the different trends over time. Investors would often debate whether or not the market is efficient. Put simply, whether or not the market is a reflection of the information made available to the investor at any time. One such theory that attempts to explain the movements and trends of a market is the Efficient Market Hypothesis (EMH). This particular theory was advocated by Professor Eugene Fama back in 1970 and is regarded as the most widely used investment theory. The EMH states that the stock market is informationally efficient where all stocks are accurately priced based on their investment properties and all investors equally possess the knowledge of these properties. The EMH also states that no investor within the market is able to achieve incredible market returns due to the fact that stocks are always priced at their fair value. However, considering the likes of Warren Buffet and his success, this idea doesn’t seem to be true. Therefore, the EMH is considered by many to be fairly inaccurate theory that shouldn’t be applied to financial markets. There can be a lot more said about the EMH however, this article, as I hope you have noticed by now, is to do with fractals. So now let’s look at an alternative theory that investors may prefer to utilize. This theory

Market efficiency tests include weak, semi-strong and strong three forms. They assume that financial markets are "informationally efficient", or that prices of trading assets, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. The weak form test is based on the past information and public available information for semi-strong while strong form covers not only the public but also the private information.

In recent observation and research, the topic of corporate finance and the proposed ideas on how make them more efficient for professional has been established in each industry and explored further. In the research article, Whither Efficient Markets? Efficient Market Theory and Behavioral Finance (2010), expands on the research proposed that issues in the measurements of markets and theories surrounding behavioral finance can be addressed through policy and proper finance knowledge. The strategy or methodology in which the author illustrates is experimental and expected cause and effect relationship. The supported evidence used in the testing gave background to the subtopic and conclusion question illustrated in week 8. The author used several studies from past industries and decades to illustrate ethical behavior behind investment and the changes in prices. ‘The theory that stock prices instantaneously adjust to reflect new information leads to the view that stock prices are unpredictable and follow a random walk. “If the flow of information is unimpeded and immediately reflected in stock prices, then tomorrow’s price change will reflect only tomorrow’s news and will be independent of the price changes today (2010). This article contributes to research observed and adds key information to the hypothesis.

Even though deviations will occur and there will be periods when securities are over or undervalued, these anomalies are expected to disappear as quickly as they appeared, thus making it almost impossible to profit from them consistently. The weak form of market efficiency theorizes that the current price does not reflect fair value and is only a reflection of past prices. It further states that the future price cannot be determined using past or current prices. The semi-strong form of market efficiency theorizes that the current price reflects all readily available information. This information might include annual reports, annual filings, earnings reports, announcements, and other relevant information that can be readily gathered. The strong form efficiency states that the stock prices reflect all information from historical, public and private sources, so that no investor can realize abnormal rate of return. Though theoretical literature talks of market efficiency, in practical terms the market is not perfectly efficient. Anomalies do exist and there are investors and traders who outperform the market. So, the EMH has very important implications for both investors and authorities that regulate and control the market. 2

Economic and other theories assume market information,. However empirical studies suggest that the market is inefficient and the information is imperfect, because management may most times have access to information that shareholders are not privy to, which leads to information asymmetry.