Financial Concepts: Efficient Market Hypothesis
AAA
  1. Financial Concepts: Introduction
  2. Financial Concepts: The Risk/Return Tradeoff
  3. Financial Concepts: Diversification
  4. Financial Concepts: Dollar Cost Averaging
  5. Financial Concepts: Asset Allocation
  6. Financial Concepts: Random Walk Theory
  7. Financial Concepts: Efficient Market Hypothesis
  8. Financial Concepts: The Optimal Portfolio
  9. Financial Concepts: Capital Asset Pricing Model (CAPM)
  10. Financial Concepts: Conclusion

Financial Concepts: Efficient Market Hypothesis


Efficient market hypothesis (EMH) is an idea partly developed in the 1960s by Eugene Fama. It states that it is impossible to beat the market because prices already incorporate and reflect all relevant information. This is also a highly controversial and often disputed theory. Supporters of this model believe it is pointless to search for undervalued stocks or try to predict trends in the market through fundamental analysis or technical analysis.

Under the efficient market hypothesis, any time you buy and sell securities, you're engaging in a game of chance, not skill. If markets are efficient and current, it means that prices always reflect all information, so there's no way you'll ever be able to buy a stock at a bargain price.

This theory has been met with a lot of opposition, especially from the technical analysts. Their argument against the efficient market theory is that many investors base their expectations on past prices, past earnings, track records and other indicators. Because stock prices are largely based on investor expectation, many believe it only makes sense to believe that past prices influence future prices.

Financial Concepts: The Optimal Portfolio

  1. Financial Concepts: Introduction
  2. Financial Concepts: The Risk/Return Tradeoff
  3. Financial Concepts: Diversification
  4. Financial Concepts: Dollar Cost Averaging
  5. Financial Concepts: Asset Allocation
  6. Financial Concepts: Random Walk Theory
  7. Financial Concepts: Efficient Market Hypothesis
  8. Financial Concepts: The Optimal Portfolio
  9. Financial Concepts: Capital Asset Pricing Model (CAPM)
  10. Financial Concepts: Conclusion
RELATED TERMS
  1. Cape Cod Method

    A method used to calculate loss reserves that uses weights proportional ...
  2. Kenney Rule

    A ratio of an insurance company’s unearned premiums to its policyholders’ ...
  3. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  4. Discounted Future Earnings

    A method of valuation to estimate the value of a firm.
  5. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
  6. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  1. What dividend yield is typical for companies in the industrial sector?

    Find out more about dividend yields, what the dividend yield measures and what level of dividend yield is typical for companies ...
  2. Which REITs pay the highest dividends?

    Find out more about real estate investment trusts and which ones have dividend yields greater than 15% for the year 2015.
  3. What does it mean to be long or short a derivative?

    Find out more about derivative securities and what it indicates when traders or investors establish a long or short position ...
  4. What does Value at Risk (VaR) have to do with maximization of shareholder wealth?

    Learn about the value at risk statistical measure and how examining the VaR for their investments can help investors maximize ...

You May Also Like

Related Tutorials
  1. Fundamental Analysis

    Ethical Investing Tutorial

  2. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  3. Economics

    American Depositary Receipt Basics

  4. Economics

    Macroeconomics

  5. Investing Basics

    Capital Budgeting

Trading Center