CFA Level 1

AAA

Securities Markets - The Efficient Market Hypothesis


What is An Efficient Capital Market?
An efficient capital market is a market that reflects all available news and information. An efficient market is also quick to absorb new information and adjust stock prices relative to that information. This is known as an informationally efficient market. Generally, efficient markets are expected to reflect all available information. If that is not the case, investors with the information may benefit leading to abnormal returns.

The following are the main assumptions for a market to be efficient:
  • A large number of investors analyze and value securities for profit.
  • New information comes to the market independent from other news and in a random fashion.
  • Stock prices adjust quickly to new information.
  • Stock prices should reflect all available information.
To learn more about the Efficient Market Hypothesis, please take a look the following article: Working Through the Efficient Market Hypothesis Weak, Semi-Strong and Strong EMH
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