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. 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.
  3. 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.
  4. Investing

    Mad Money ... Mad Market?

    Jim Cramer's spirited recommendations are a case study in irrational market behavior.
  5. Investing

    The Evolution Of Money Management

    We look at the development of the money management profession and how it impacts professional money managers today.
  6. Financial Advisor

    A Quick Guide On Behavioral Funds

    Investopedia explores the working of behavioral funds, their benefits and risks, and an analysis of their past returns.
  7. Investing

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
Frequently Asked Questions
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and how to ...
  2. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ...
  3. What does a Chief Financial Officer (CFO) do?

    A CFO is responsible for accurate reporting of a company's financial information, investing the company's money and identifying ...
  4. How did George Soros break the Bank of England?

    George Soros pocketed $1 billion by betting against the British pound, cementing his reputation as the premier currency speculator ...
Trading Center