Efficient Market Hypothesis Assignment Report

Running head: EFFICIENT MARKET HYPOTHESIS
Efficient market hypothesis
Name of the Student
Name of the University
Author Note

EFFICIENT MARKET HYPOTHESIS
Table of Contents
Introduction:...............................................................................................................................2
Literature review:.......................................................................................................................3
Application by corporate manager:............................................................................................5
Conclusion:................................................................................................................................7
References list:...........................................................................................................................8

EFFICIENT MARKET HYPOTHESIS
Introduction:
For gaining an understanding of the “efficient market hypothesis”, it is first important
to understand what an efficient market is. Efficient market is a market where there is an
active competition going on between a large number of profit maximizers and rational
investors and there is free availability of information. The financial decision making is
underpinned by the efficient market and this market is inherently fundamental to the theory of
Fama. The hypothesis of efficient market is fundamental in explaining the movements in the
price of assets and this implies that all the information is instantly reflected in the stock price
and market is efficiently operating. Assets price respond immediately to the new information
and fluctuations in price cannot be fluctuated as all the investors or market participants are
privy to the same available information. Consequently, investors in the efficient market
cannot earn above average if they do not accept additional risks. As per the theory, assets
price or stock prices only reacts to new information and there is no consistent risk adjusted
excess return is produced by either technical analysis or fundamental analysis (Sunon, 2018).
It is therefore suggested by the hypothesis that trading of stock is always done at fair value
where the investors are provided with the opportunity of either selling stocks at inflated price
or purchasing undervalued stocks. Hence, using the expert stock selection and market timing
cannot be used by the investors to beat the market (Lin et al., 2018). Therefore, it is suggested
by the theory that all the known information about any stock is incorporated in the price and
thereby any investors would not be provided benefit over other investors by means of any
analysis.
The market efficiency is characterized by three different level of assumed efficiency
which comprised of strong, weak and semi strong form.

EFFICIENT MARKET HYPOTHESIS
Strong form- In the strong form of efficiency, stock prices factors all the publicly
available and confidential information and this prevents the investors from gaining any
competitive advantage over the market.
Weak form-It is assumed in this hypothesis that all the publicly available information
is reflected in the securities price but the price does not factor any newly public available
information. That is the future price of stocks do not depend upon the past price, volume and
return of stocks. Since the future stock price cannot be predicted based on past price, no
consistent excess return is provided by the technical trading strategies (Ausloos et al., 2016).
Semi strong form- Usefulness of both fundamental and technical analysis is
dismissed under semi strong form of hypothesis. All the publicly available information is
reflected in the price of shares and this makes it difficult for the investors to gain any
abnormal return.
The application of efficient market hypothesis has always fallen short of because of some
drawbacks and have been challenged in terms of the practical application.
Literature review:
True market value of securities is reflected in their prices in the efficient market
hypothesis. In order for the share prices to factor all the private and publicly available
information and avoiding investors to obtain excess return, market should be efficient and
strong. Under such conditions, the price of securities is less impacted by the basic structure of
market in terms of disclosure system. One of the fundamental insights into the theory of
efficient market hypothesis is that the optimal usage of all the available information is
reflected in the price of assets (Calin & Lupu, 2016). It can be formally stated that the
fundamental value of assets is optimally forecasted by the price of assets that are actively
traded. Concerning the assets price behavior, the hypothesis carries several implications. The