Financial Concepts: Efficient Market Hypothesis
  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. Market Efficiency

    The degree to which stock prices reflect all available, relevant ...
  2. Price Efficiency

    The premise that asset prices are efficient, to the extent that ...
  3. Weak Form Efficiency

    One of the different degrees of efficient market hypothesis (EMH) ...
  4. Informationally Efficient Market

    A theory, which moves beyond the definition of the efficient ...
  5. Hypothesis Testing

    A process by which an analyst tests a statistical hypothesis. ...
  6. Overreaction

    A market hypothesis stating that investors and traders react ...
RELATED FAQS
  1. What are the differences between weak, strong and semi-strong versions of the Efficient ...

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  3. What is an efficient market and how does it affect individual investors?

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  4. What is the relationship between confidence inferrals and a null hypothesis?

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  5. Does a high efficiency ratio mean that the company is profitable?

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