EMH and Technical Analysis
Technical analysis bases decisions on past results. EMH, however, believes past results cannot be used to outperform the market. As a result, EMH negates the use of technical analysis as a means to generate investment returns.

With respect to fundamental analysis, the EMH also states that all publicly available information is reflected in security prices and as such, abnormal returns are not achievable through the use of this information. This negates the use of fundamental analysis as a means to generate investment returns.

EMH and the Portfolio Management Process
As we have discussed, the portfolio management process begins with an investment policy statement, including an investor's objectives and constraints. Given EMH, the portfolio management process should thus, not focus on achieving above-average returns for the investor. The portfolio management process should focus purely on risks given that above average returns are not achievable.

A portfolio manager's goal is to outperform a specific benchmark with specific investment ideas. The EMH implies that this goal is unachievable. A portfolio manager should not be able to achieve above average returns.

Why Invest in Index Funds?
Given the discussion on the EMH, the overall assumption is that no investor is able to generate an abnormal return in the market. If that is the case, an investor can expect to make a return equal to the market return. An investor should thus focus on the minimizing his costs to invest. To achieve a market rate of return, diversification in a numerous amounts of stocks is required, which may not be an option for a smaller investor. As such, an index fund would be the most appropriate investment vehicle, allowing the investor to achieve the market rate of return in a cost effective manner.

Conclusion
Within this section we have discussed the organization and function of securities markets, the composition and characteristics of the various weighting schemes, and the various implications of the efficient market hypothesis.



Introduction

Related Articles
  1. Insights

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  2. Investing

    Efficient Market Hypothesis: Is The Stock Market Efficient?

    Deciding whether it's possible to attain above-average returns requires an understanding of EMH.
  3. Insights

    The Efficient Market Hypothesis: Settling the Great Debate

    An understanding of neuroscience and the decision-making process provides a resolution to the decades-old debate between proponents and critics of the Efficient Market Hypothesis.
  4. Insights

    Investopedia Explains Fractal Markets Theory

    Fractal Market Hypothesis has emerged as an alternative to longstanding economic theories due to its ability to explain investor behavior during crises.
  5. Investing

    A Beginners' Guide To Managing Your Money

    Discover what you need to know before becoming your own money manager.
  6. Investing

    The Evolution of ETFs

    Key 20th-century financial theories changed the way investors viewed markets and created the circumstances in which ETFs could emerge.
  7. Investing

    Is Stock Picking A Myth?

    Find out if mutual fund managers can successfully pick stocks or if you're better off with an index fund.
Frequently Asked Questions
  1. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
  2. How can I purchase stocks directly from a company?

    There are a few circumstances in which a person can buy stock directly from a company. The following is meant to cover some ...
  3. How do university endowments work?

    Endowments represent money or other financial assets that are donated to universities or colleges. The sole intention of ...
  4. Is it possible to take the Series 6 exam without being sponsored?

    Unfortunately, the answer to this question is "No." The Financial Industry Regulatory Authority or FINRA (previously the ...
Trading Center