The Efficient Market Hypothesis Theory Essay

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Finance Investment and Analysis Question 1 The efficient market hypothesis theory states that it is impossible to “beat the market” because of the stock market efficiency causes the existing share prices to reflect all relevant information. Critically evaluate the above statement with reference to the three forms efficient market hypothesis. The efficient market hypothesis ‘is a theory of stock prices which suggests that the market as a whole tends to find the best price for stocks all the time. At any point in time, the price of any stock reflects all of the information available about that stock (and the underlying business).’ (Trendshare: find the right price for stocks, 2015). This hypothesis was deleveoped in the 1960s by a man called Eugene Fama. The three forms of efficient market hypothesis are weak, semi-strong and strong. A weak market is, ‘A market for one or more securities in which there are few buyers and many sellers. A weak market comes about due to declining prices, and it is sometimes associated with high trading volume.’ (TheFreeDictionary.com, 2015) A weak market goes by past information not present for example, Capital Markets which are Government Bonds etc. In A Semi-Strong market for example a capital market , ‘it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information.’ (The Efficient Market Hypothesis, 2015) In A
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