Essay on The Tests for Market Efficiency

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During the 20th century, academic financial economists extensively accepted the efficient market hypothesis. Almost everyone was alleged that stock markets and securities market are highly efficient in response to any new information in the market. It was argued that when information regarding factors influencing market arises, the information spread like wild fire in the market and the prices of stocks adjust accordingly without any delay. This means that neither the fundamental analysis related to analysis of financial information of the company such as earnings, capital stock etc nor the technical analysis related to the analysis of historical performance of the stocks of the company enables the investor either experienced or not to get…show more content…
In some journal an interesting example related to the idea of random walk is that random walk is like a blindfolded chimpanzee throwing darts at Wall Street and selects any portfolio which yields equal to the portfolio selected by any expert. The idea of random walk is just like throwing a towel on the stock of different category to formulate an appropriate portfolio at lower cost.
Most of the investors try to select the securities which are mis-priced undervalued due to the reason that in future price of these securities will increase and they are able to outperform the market. The portfolio managers identify the securities which are able to outperform the market and they use variety of different techniques to predict the performance of the securities and stock. The financial analysis gives comparative advantage to the investors which results in substantial profits. The efficient market hypothesis argues that any technique is not capable to generate excess due to dependable predictability of stock and securities return. The efficient market hypothesis argues that it is very difficult to predict the future stock return and also the predictions are not consistent. The important and main force behind the price change is the arrival of new information. It is a presumption that market is efficient if the price of stock change averagely without any bias in response to the new information in the market without waiting for any other
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